IR35 and off-payroll working, what businesses should still be aware of

IR35 has been around for years, yet it remains one of the most misunderstood areas of UK tax and employment status law.

Many businesses assume it is only relevant to contractors. Others think the changes have “settled down” and no longer require attention.

That can be a costly mistake.

IR35, also known as the off payroll working rules, is designed to ensure that individuals who work like employees, but through their own limited companies, pay broadly the same tax and National Insurance as employees.

The issue is not what the contract says. It is how the working relationship operates in reality.

Who the rules apply to

The rules apply where:

• A worker provides services through an intermediary, usually their own personal service company.
  They would be considered an employee if engaged directly.
• Since the reforms, medium and large private sector businesses are responsible for determining the contractor’s employment status for tax purposes.
• Small businesses are generally exempt from making status determinations, with responsibility remaining with the contractor’s company.

Understanding whether your business is classified as small, medium or large under the Companies Act thresholds is the starting point.

Why status matters

If a contractor falls “inside IR35”, payments must be subject to PAYE and National Insurance, similar to an employee.

If they fall “outside IR35”, they can continue to be paid gross through their company.

Incorrect classification can result in:

• Backdated income tax and National Insurance
• Interest and penalties
• HMRC investigations
• Reputational risk

The financial exposure can be significant, particularly where multiple contractors are involved.

The key factors HMRC considers

There is no single test, but several factors carry weight.

Control

Who decides how, when and where the work is carried out. A high level of control suggests employment.

Substitution

Can the contractor send someone else to perform the work. A genuine right of substitution supports self employment.

Mutuality of obligation

Is the business obliged to offer ongoing work, and is the contractor obliged to accept it. An ongoing expectation can point towards employment.

Financial risk

Does the contractor bear financial risk, such as correcting defective work at their own cost.

Integration

Is the contractor treated as part of the organisation, attending staff meetings, having a company email address, or managing employees.

HMRC looks at the reality of the arrangement, not just the written contract.

Practical risks for businesses

Many businesses engage contractors because they want flexibility.

However, problems often arise where:

• Contractors are treated identically to employees.
• Engagements run for long periods without review.
• Status determination statements are not issued correctly.
• Internal processes are inconsistent.

If HMRC investigates, it will look at actual working practices, not just paperwork.

Getting it right

Businesses that regularly engage contractors should:

• Review employment status carefully before engagement.
• Issue clear status determination statements where required.
• Ensure contracts reflect the true nature of the relationship.
• Train hiring managers so working practices align with the intended status.
• Review long term contractor arrangements periodically.

IR35 is not simply a tax issue. It sits at the intersection of tax law, employment law and operational practice.

Make IR35 decisions evidence-based

Misclassification can distort financial planning. Employer National Insurance costs can be significant if contractors are reclassified. This affects budgeting, profit margins and workforce strategy.

At the same time, over cautious classification can make your business less competitive in attracting specialist talent.

The goal is not to push every contractor inside or outside IR35 automatically. The goal is to make defensible, evidence based decisions.

IR35 is not new. But it remains active. And for businesses that rely on flexible talent, it should still be firmly on the radar.

Where there is uncertainty, seeking advice early can help avoid costly issues further down the line. Through Signature Concierge, businesses can access the expertise available across the WLR Group for support with IR35, contractor engagements, and wider workforce considerations.

If you would like an initial discussion regarding IR35 or off-payroll working, contact Signature Concierge on 01773 713 846 or email [email protected].