Last reviewed 11 May 2017

IR35 (sometimes also known as the “intermediaries’ legislation” or “off-payroll working”) is a set of rules that apply if an individual works for a client through an intermediary. In April 2017, there were changes to the rules governing the public sector. Stuart Chamberlain, author and employment law specialist, examines the IR35 rules, the changes that came into effect for the public sector in April 2017, and considers their implications.

The IR35 rules

IR35 is a set of complex rules that affect an individual’s tax and National Insurance contributions (NICs) if he or she is contracted to work for an intermediary. It was introduced in April 2000 and named after the HM Revenue & Customs (HMRC) press release in which the rules were announced. It is also known as “intermediaries’ legislation” and sometimes described as “off-payroll working”.

IR35 is thus anti-avoidance legislation: its stated aim is to prevent people who supply their services to clients through their own company (often known as a “personal service company”) or limited liability partnership and without paying the relevant tax. In the eyes of the HMRC, those who do supply their services through such an intermediary should be classed not as “self-employed” but under IR35 as “disguised employees” and taxed in the same way as general employees — so subject to the appropriate Pay As You Earn (PAYE) and National Insurance (NI) payments.

New rules came into effect in April 2017 — but only for the public sector. From 6 April 2017 it is the responsibility of the public sector body, not the intermediary, to assess if the workers are covered by the IR35 rules and, if so, to make the appropriate tax and NIC deductions at source.

An “intermediary” under the IR35 legislation

Under the IR35 legislation an “intermediary” can be:

  • the individual’s own limited company

  • a service or personal service company

  • a partnership.

If the IR35 legislation does apply, then the intermediary has to operate PAYE and NICs on any salary or wages paid to the individual, although in the public sector, with effect from 6 April 2017, responsibility for operating the off-payroll rules and the deduction of tax and NICs moved to the public sector body or agency — see below.

IR35 assessments

HMRC will examine both contracts and working practices to see whether or not the IR35 rules apply. The contract must reflect the true working practices. It will look at a variety of factors, predominantly the well-known tests of control, mutuality of obligation and personal service to ascertain employment status — whether genuinely self-employed or “disguised employment”. The ability to send a substitute to provide services will be an important factor to show self-employment; an employee would provide these services personally.

There is an IR35 Helpline, which offers advice on the rules. HMRC also runs a service that reviews contracts to ascertain if IR35 applies — the Contract Review Service. There is a right of appeal against HMRC’s opinion.

Changes to the IR35 legislation in April 2017

Reform was necessary: the rules had become too complex and, with a massive growth in the number of personal service companies (PSCs), HMRC was unable to monitor the position effectively. The Government estimated that 90% of the individuals affected in the public sector were not paying enough tax: an annual loss to HM Treasury of some £400 million.

The public sector

New rules now apply to “off-payroll working” in the public sector. As a result of legislation that came into force on 6 April 2017 under the Finance Act 2017, for contracts entered into, or payments made, on or after 6 April 2017, the responsibility for deciding if the off-payroll rules (IR35) apply to engagements in the public sector, will move from an individual worker’s PSC to the public sector body, agency or third party paying them. That organisation will also be responsible for deducting and paying associated employment taxes and NICs to HMRC.

The definition of the public sector is used in the Freedom of Information Act 2000. The reforms affect, therefore, central and local government, the NHS, the armed forces, the police and Transport for London, among others. The Government estimates that some 30,000 people in the public sector will be affected by these changes.

The Government has published guidance to help public authorities understand how these reforms change the way they pay for affected workers. This includes access to the Employment Status Service tool to obtain the HMRC view of whether any current and prospective workers would fall within the off-payroll rules from 6 April 2017. The guidance is available at

The private sector

The situation remains unchanged in the private sector. The responsibility for deciding if the IR35 rules apply and for paying the appropriate taxes remains with the intermediary. The criteria for assessing if an intermediary falls within the IR35 rules have not changed.

There are rumours that the change of IR35 rules in the public sector is a dry run for its extension into the private sector but the HMRC has refused to comment on this. The Government says that it has no current plans to make these changes.

Penalties for non-compliance with the IR35 rules

The IR35 penalty regime can be costly and time-consuming for contractors, especially if they face action by HMRC in a tax tribunal and the courts.

Note that the days of a negotiated settlement with the contractor’s accountant ended in 2009: the regime requires taxpayers to exercise reasonable care — to check what should be the correct tax position. Companies and contractors may face an inspection by HMRC and the imposition of penalties.

Under the “deemed payment” rules a contractor caught within the IR35 rules — and thus regarded by HMRC as a “disguised employee” — can be liable for up to 25% more tax and NICs per year, and without any attendant employment rights. The HMRC may charge interest on any tax and NICs owed.

Penalties will be levied where the contractor is regarded as “careless” in under declaring the tax liability — the penalty is likely to be 30% of unpaid tax.

Further and steeper penalties can be imposed by HMRC if it can be proved that the IR35 rules were deliberately ignored or flouted — the penalty will be 70% of unpaid tax.

Similarly, if an engager or agency deems someone to be outside IR35 when in fact they are caught by the rules, they will be liable to pay any taxes and NICs to HMRC, plus any penalties. These taxes may be “clawed back” as far as 6 April 2017.


It remains to be seen whether the April 2017 changes to the IR35 rules in the public sector are extended to the private sector. Such changes would affect hundreds of thousands of workers.

Critics of the scheme maintain that the changes in the public sector will lead to a reduction in an individual’s take-home pay and to people leaving for work in the private sector. The price of compliance has become higher for public authorities.

It all underlines the importance of being able to prove to HMRC that the individual is a genuine independent contractor, freelancer or consultant in business of their own account and thus avoid the application of the IR35 rules. The best advice is to check everything and then check it again.

Alternatively, an individual could consider moving to a PAYE umbrella company: this offers tax advantages but, as it makes PAYE and NICs payments, it will never fall within the grasp of the IR35 regime.