Guide
IR35 rules for off-payroll working
How to assess contractor status under IR35 off-payroll working rules. Covers who must make determinations, the key employment tests, CEST tool, and penalties for getting it wrong.
IR35 (off-payroll working) rules determine whether a contractor working through their own limited company should be taxed as an employee. Getting the status wrong can result in significant tax liabilities and penalties.
Since April 2021, medium and large businesses must assess the employment status of contractors they engage. Small businesses are exempt - the contractor remains responsible for their own status.
Understanding employment status
Before considering IR35, you need to understand the fundamental distinction between employees, workers, and self-employed contractors:
Does IR35 apply to your business?
IR35 rules affect you if you engage workers who:
- Provide services through their own limited company (Personal Service Company/PSC)
- Would be an employee if contracted directly
- Work under your direction and control
Whether you need to make status determinations depends on your business size:
Who determines contractor status?
The responsibility for determining whether a contractor is inside or outside IR35 depends on your business size and sector:
Assessing employment status
If you're a medium or large business (or a public sector client), you must assess each contractor engagement to determine if they're inside or outside IR35. This assessment is based on the actual working relationship, not just what's written in the contract.
How to make a determination
Follow this process to assess contractor status and fulfil your obligations:
-
Use HMRC's CEST tool
The Check Employment Status for Tax tool (gov.uk/guidance/check-employment-status-for-tax) provides HMRC's view on status. Complete it accurately - HMRC will stand by the result if challenged, provided you answer honestly.
-
Assess each engagement individually
Don't apply blanket determinations. Each contract must be assessed on its specific terms and actual working practices, not just what the contract says.
-
Issue Status Determination Statement
Provide written SDS to contractor and any agency before work starts, explaining your determination and the reasons behind it.
-
Allow the right to disagree
Contractors can challenge your determination. You must have a dispute resolution process and respond within 45 days with reasons.
If the contractor is "inside IR35"
When a contractor is inside IR35, you (or the agency paying them, the 'fee-payer') must:
- Deduct Income Tax and employee National Insurance from payments
- Pay employer National Insurance (15% from April 2025)
- Report through PAYE Real Time Information
- Include in Apprenticeship Levy calculations (if applicable)
The contractor does not become an employee - they retain no employment rights such as holiday pay, sick pay, or unfair dismissal protection. You're only responsible for tax treatment.
IR35 and Construction Industry Scheme (CIS) interaction
In construction, both IR35 and CIS can apply to the same payment. Understanding how they interact is critical:
Penalties for getting it wrong
If HMRC determines you've incorrectly assessed a contractor as outside IR35:
- Unpaid tax and NI: You'll owe all tax and NI that should have been deducted, potentially going back years
- Interest: Charged from when tax should have been paid to when it's actually paid
- Penalties: Up to 100% of unpaid tax for deliberate non-compliance; lower penalties for careless errors
- Transfer of debt: If the fee-payer can't pay, liability transfers up the supply chain to you
The financial risk can be substantial - a single high-earning contractor assessed incorrectly for 2-3 years could result in £50,000+ in back taxes and penalties.
Record keeping
Keep detailed records of:
- Your assessment process and CEST results
- Status Determination Statements issued
- Any disagreements and your responses
- The actual working practices (not just contractual terms)
These records are essential if HMRC challenges your determinations.