What is IR35 and how does it work?

IR35 is a set of UK tax rules aimed at preventing tax avoidance by individuals providing their services through an intermediary, such as a personal service company (PSC), but who would be considered an employee if engaged directly.

In simple terms, IR35 determines whether an individual providing services through a PSC should be treated as an employee for tax purposes. If they are considered an employee under IR35, taxes must be paid as if they were an employee, which includes income tax and National Insurance Contributions (NICs).

The responsibility for determining IR35 status originally rested with the contractor until the IR35 reforms were introduced in April 2017 in the public sector and rolled into the private sector in April 2021. Where the worker is working for a medium or large company, the onus for assessing the status and tax liability lies with the client receiving the services. Non-compliance can result in significant backdated tax liabilities.

The IR35 rules apply to contractors, freelancers, consultants, and firms where services are provided to clients through an intermediary, such as a PSC. It does not apply to self-employed people who operate as sole traders.