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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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Introduction: overview of IR35

The IR35 legislation was introduced in April 2000. In an IR35 case, a worker provides their services to a client via an intermediary. The intermediary can be:

  • a company
  • a partnership
  • an unincorporated association, or
  • another individual.

Typically, the intermediary is the worker’s own personal service company (PSC) and consists of two Directors or one Director and the Company Secretary (who are often husband and wife). There are normally no other employees and usually only one worker is providing their services to the client.

The intermediary earns all, or almost all, of its income from supplying the worker’s services in circumstances that would be employment if the worker were engaged directly by the client. However, there is no contract between the worker and the client. Instead, there is a contract between the intermediary and the client (either directly or via an agency) and the intermediary is paid to supply the worker’s services. The worker receives (or is entitled to receive) payments or benefits from the intermediary.

These arrangements do not come within the provisions of the Agency legislation (ESM2001) and prior to April 2000 (ESM3011) provided an opportunity to disguise what would otherwise be an employment relationship with the client to:

  • reduce or avoid the individual’s liability to pay tax and primary Class 1 NICs, and
  • reduce or avoid employers’ liability to NICs.

Legislation came into effect from 6 April 2000 to address this issue. It is generally known as the “Intermediaries” legislation or “IR35” (ESM3010).

The effect of IR35 legislation

IR35 legislation requires the underlying nature of a worker’s relationship with a client to be considered. A crucial factor is whether the worker would have been an employee of the client if they had not been engaged via an intermediary.

When IR35 applies (ESM3030) the income of the intermediary is regarded as the worker’s earnings from the employment. The intermediary is treated as making a “deemed employment payment” (ESM3140) to the worker, which is chargeable to tax as employment income and subject to Class 1 NICs (ESM3181).

The IR35 legislation does not apply to managed service companies (MSC) and some composite service companies. An intermediary must consider whether the MSC legislation at Chapter 9 of the Income Tax (Earnings and Pensions) Act applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.

IR35 legislation impacts different areas of taxation and must be taken into account in various situations, such as when dealing with self-assessment or corporation tax returns. Guidance about how IR35 cases are handled by HMRC and where staff can obtain advice is available at ESM3005. Guidance about how external customers can get advice is at ESM3008.