How do I determine if IR35 applies to me?

Question

Accepted Answer

# Does IR35 Apply to Me?

IR35 (the "intermediaries legislation") is a set of rules that determines whether a worker providing services through an intermediary (such as a personal service company, or PSC) should be treated as an employee for tax and NICs purposes. Here is how to determine if it applies to you.

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## What the Law Says

### Step 1: Are the Basic Conditions Met?

IR35 applies where **all** of the following conditions are satisfied:

1. A worker provides services to a client **under arrangements involving an intermediary** (e.g. your own limited company), rather than under a direct contract with the client;
2. If the contract **had been made directly** between the client and the worker, the worker would have been regarded as an **employee or employed earner** of the client; and
3. The worker, or an associate, **receives or is entitled to receive a payment or benefit** from the intermediary that would not otherwise have been chargeable to tax as employment income.

This is also confirmed in the legislation itself (ITEPA 2003, s.49), which states that Chapter 8 applies where:
> *"an individual ('the worker') personally performs, or is under an obligation personally to perform, services for another person ('the client')… the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ('the intermediary'), and… if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client."*

### Step 2: Who Is Responsible for the Determination?

This depends on the **size of the client** and whether it is a public authority:

- **Public authorities and medium/large private sector clients** → The **client** is responsible for making the status determination (under ITEPA 2003, ss.61K–61X — the "off-payroll working rules"). The client must issue a **Status Determination Statement (SDS)**.
- **Small private sector clients** → The **worker's intermediary (PSC)** is responsible for self-assessing under ITEPA 2003, ss.48–61 (Chapter 8).

### Step 3: Office-Holders

IR35 also applies where the worker is an **office-holder** under the client. For NICs purposes this has always been the case; for tax purposes it applies to services provided on or after **6 April 2013**.

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## HMRC Guidance / Practice

### The Correct Order of Analysis

Before reaching IR35, a PSC must first consider other legislation in this order:

1. **Agency legislation** (takes precedence — but does not apply if the worker's services are not subject to supervision, direction or control by any person)
2. **Managed Service Company (MSC) legislation**
3. **IR35 legislation** (only if neither of the above fully applies)

### The "Hypothetical Contract" Test

The key question under IR35 is whether, if the worker had contracted **directly** with the client (without the intermediary), that contract would have been one of **employment**. This is assessed by constructing a **hypothetical direct contract** and applying established employment status case law tests.

The main factors considered are:

- **Mutuality of obligation**: There must be an "irreducible minimum" of mutual obligation — the client must be obliged to pay and the worker obliged to do the work.
- **Control**: Whether the client has the right to control *how* the work is done.
- **Personal service / substitution**: Whether the dominant feature of the arrangement is the personal service of the specific worker. A limited right of substitution does not necessarily negate personal service.

### HMRC's CEST Tool

HMRC provides the **Check Employment Status for Tax (CEST)** tool to help determine employment status under the off-payroll working rules.

### Seeking an Opinion from HMRC

Where there is uncertainty, relevant papers (including contracts) can be submitted to HMRC's **IR35 Unit** for an opinion on whether the legislation applies to a particular engagement.

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## Summary Flowchart

```
Do you provide services via an intermediary (e.g. your own PSC)?
 ↓ Yes
Does the agency legislation fully apply? → Yes → IR35 does not apply
 ↓ No
Does the MSC legislation apply? → Yes → IR35 does not apply
 ↓ No
Is the client a public authority or medium/large private sector?
 → Yes → Client makes the status determination (off-payroll rules, Chapter 10)
 → No → You (via your PSC) self-assess under IR35 (Chapter 8)
 ↓
Would you be an employee under a hypothetical direct contract?
 → Yes → IR35 applies; deemed employment payment required
 → No → IR35 does not apply
```

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