IR35 compliance checklist for employers

Public sector bodies and medium/large private sector businesses now must determine IR35 for contractors working through a personal service company.

If you already know what IR35 is, please feel free to skip past the FAQ. Underneath, we share an IR35 checklist so that you can preliminarily determine whether your existing contractors are outside IR35 or not.

For more information on IR35 compliance for employers, please call +44 (0) 203 051 9792, email [email protected] or fill out the form below.

IR35 checklist FAQ

What is IR35?

The purpose of IR35, sometimes called the “Intermediaries Legislation”, is to correctly classify the employment status of engagements with personal service companies.

If the working arrangements of your contractor are akin to self-employment, they will be outside IR35. However, if contractors have similar working practices to salaried employees, they will likely be inside IR35.

Why does IR35 exist?

HMRC is convinced that hundreds of thousands of employers and employees enter into secret deals to avoid paying tax.

They want contractors to pay the same tax as salaried employees and came up with IR35 as a way of determining whether contractors are in fact, in their words, “disguised employees”.

Why is outside IR35 status important to contractors?

The tax status of a contractor is far more favourable than that of an employee.

Contractors don’t have income tax and National Insurance contributions deducted from their invoices. Employees are deducted both when they get their payslips.

There are benefits to employers too. You don’t have to pay National Insurance Employers’ Contributions, pension contributions and, if applicable, the Apprenticeship Levy. They’re not covered by standard employment law so there’s no sick pay or holiday pay to work out.

Everyone wins…except HMRC. And they’re not happy about that.

Why is IR35 status determination my responsibility and not the contractors?

Contractor IR35 self-determination was the norm until April 2017. After that point, public sector bodies became responsible for IR35 status determination. In April 2021, this was extended to private sector companies primarily with turnover greater than £10.2m.

The reason for transferring responsibility is that the people responsible for booking contractors in organisations like HR, procurement, CFOs and so on are generally not as conversant on IR35 as contractors themselves are (no offence intended).

HMRC believed that they would be more likely to declare contractors as working within IR35 to avoid being punished. If a contractor is declared outside IR35 and later found to be within IR35, the company or organisation must pay all relevant tax not yet collected plus a fine on top. Fines increase depending on the level of due care when determining IR35 status.

HMRC were correct. Following the introduction of the revised off-payroll working rules, the number of people recorded as employed jumped sharply primarily in sectors where contract work is normal.

What do we need to do to comply with IR35?

Under IR35 rules, you are the “end client” – the business or organisation primarily benefiting from the services provided by your contractor. If you recruitment strategy is to hire directly, you will also be the “fee payer” – the body responsible for paying the contractor.

If you hire through a recruitment agency, they will be the “fee payer”.

As the end client, you must create an IR35 status determination statement and pass it on to the contractor and all other parties involved in the supply chain before work commences.

Please note that if an umbrella company supplies a contractor to you, then your contractor will be automatically deemed as inside IR35.

We provide the below IR35 checklist to help you better understand what’s required in both a written contract with a self employed contractor as well as the conditions they work under.

IR35 compliance checklist – what you need to know

End clients need to consider the following points when assessing the IR35 status of a contractor:

Financial risk. Your written contract should stipulate that a contractor is financially responsible for remedying any mistake made. Where feasible, they should use their own equipment to provide services to you.
Insurance. A genuinely self-employed contractor will have both professional indemnity insurance and public liability insurance.
Non-exclusivity. Forcing a contractor to work for the same client is likely to mean that they’re an employee. If your contractors work for more than one client, they are more likely to be declared as genuinely self-employed contractors. This is however not certain and depends on the contract and working conditions at each employer.
Substitution rights. You should not forbid your contractor from sending in someone else to do the work stipulated in your contract.
Obligation to each other. You should not be obliged to provide work to your contractor and they should not be obliged to accept any work offered.
Control. You should not stipulate where, when and how your contractor performs services for you. They should not be managed like employed staff within the company nor should they be responsible for managing your staff.

It’s not that simple though

IR35 is complex employment law with 20 years of case history behind it. Around one in five cases are borderline meaning that HMRC might not agree with your assessment.

It’s better to get IR35 sorted out before your contractor starts and have a system in place for making sure that their working conditions match the written contract they’re working under.

This is where CoComply can help. We work with public and private sector clients to make sure their contractors remain outside IR35 making your workplace more attractive to some of the UK’s most talented specialists. Get in touch with us to find out more.