September 11

What is off-payroll working (IR35)?


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On Budget day 1999, then chancellor of the exchequer Gordon Brown announced that measures would be introduced to stop the avoidance of tax and National Insurance contributions through the use of intermediaries such as personal service companies (PSCs) and partnerships in circumstances when an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker. The rules quickly became known as IR35 – the reference on the announcement.

The government was worried by the increasing use of PSCs. In particular, it had concerns about the individual who ‘…leaves work as an employee on a Friday only to return the following Monday to do exactly the same job as an indirectly engaged “consultant” paying substantially reduced tax and National Insurance’.

Original proposals

Between 2001 and 2002, Mr Beagles participated in some tax avoidance arrangements that were designed by KPMG to create a tax deduction with no corresponding taxable amount. Ultimately, the arrangements were found to be ineffective in Astall v HMRC [2010] STC 137.

The Revenue published details of its proposals in April 1999 and these were met with almost universal opposition. The proposals were to apply:

  • to all those (‘workers’) supplying services (to ‘clients’) through intermediaries including companies and partnerships;
  • where the client had a right of supervision, direction or control as to the tasks undertaken or the manner in which they were performed.

In such cases, the client would have had to deduct PAYE and National Insurance from the amounts invoiced by the intermediary. This obligation could be ignored only if the client knew that ‘substantially’ all the monies related to the work done were paid on to the worker as salary and were thus subjected to PAYE and National Insurance in the intermediary.

Revised proposals

As a result of the criticism of, and opposition to, the original measures, the Revenue modified the proposals on 23 September 1999. Under these, two important features of the April 1999 scheme were dropped.

  • The intermediary, not the client, had to decide whether to operate PAYE on a payment. It was not necessary for clients to check whether the legislation applied when they entered into a contract with an intermediary or to conduct new checks on the status of the intermediary.
  • The control test was replaced by a series of tests using the existing employment/self-employment divide.

The legislation applies when:

  • a worker provides their services to another person (the client);
  • the arrangements for these services are not made directly with the client but through a third party (known as the intermediary);
  • if the arrangements had been with the client, not the intermediary, the worker would have been treated as an employee of the client for tax and National Insurance purposes. These are referred to as ‘relevant engagements’.
  • From day one there were two inherent problems with the IR35 rules.

First, they relied on the recipient to decide on their own tax and National Insurance position and self-police the system. Second, assuming that HMRC raised an enquiry – which for more than ten years was almost unheard of – there was no simple answer, because HMRC was drawn into protracted status arguments.

Fast forward seven years

Various structures were created to avoid the IR35 rules, so from 6 April 2007, ITEPA 2003, s 61A et seq, more commonly known as the managed service company (MSC) legislation, was introduced. This applies to individuals providing their services through intermediaries that meet the definition of an MSC. An intermediary must consider whether the MSC legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.

Then, in April 2014, the agency rules were broadened to expand the PAYE obligations of such businesses and also to create a returns requirement (from April 2015) in specified situations.

Public sector

As part of the battle against disguised employment, increasing enforcement by HMRC and the much-publicised trials and tribulations of several organisations including the BBC, the government decided to go back to square one in April 2017. The emphasis for judging the tax and National Insurance position was passed back to the payer as in the original proposals in 1999.

Broadly, the new rules apply when:

  • an individual (the worker) personally performs, or is under an obligation personally to perform, services for another person (the client);
  • the client is a public authority;
  • the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (the intermediary); and
  • the circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded as an employee or office-holder of the client or the worker is an office-holder who holds that office under the client and the services relate to the office.

A ‘third party’ includes a partnership or unincorporated association of which the worker is a member. Mark Ltd shows how the rules work.

Under ITEPA 2003, s 61R the tax and PAYE rules apply as if the worker were employed by the person treated as making the deemed direct payment and the services were performed, or to be performed, by the worker in the course of performing the duties of that employment.

As a result, looking at the Mark Ltd example, the £100,000 less the associated £30,000 will appear on the employment pages of Mark’s personal tax return for 2017-18 unless he wishes to dispute the deemed employment status.


There is also the issue of extracting the £65,000 cash from the company that has already been subject to PAYE. The cash must be taken out legally from a company law perspective, which really leaves two options.

  • Option 1 is to take the money out as salary, which will give a deduction in the accounts.
  • Option 2 is to take the money out as a distribution, which will not give a deduction in the accounts.

There appears to be no option 3 of a loan account withdrawal because there is nothing to credit against the account.

On the prevention of a double charge, s 61W states that when a person:

  • receives a payment or benefit (‘the end-of-line remuneration’) from another person (‘the paying intermediary’);
  • the end-of-line remuneration can reasonably be taken to represent remuneration for services of the payee to a public authority;
  • a payment (‘the deemed payment’) has been treated as made to the payee;
  • the underlying chain payment can reasonably be taken to be for the same services of the payee to that public authority; and
  • the recipient of the underlying chain payment has borne the cost of any PAYE and National Insurance in respect of the deemed payment;

the paying intermediary and the payee may treat the amount of the end-of-line remuneration as reduced (but not below nil) by any one or more of:

  • the amount of the deemed payment;
  • the amount of any capital allowances in respect of expenditure incurred by the paying intermediary that could have been deducted from employment income under CAA 2001, s 262 if the payee had been employed by the public authority and had incurred the expenditure; and
  • the amount of any contributions made, in the same tax year as the end-of-line payment, for the benefit of the payee by the paying intermediary to a registered pension scheme that, if made by an employer for the benefit of an employee, would not be chargeable to income tax as income of the employee. This does not does not apply to excess contributions paid and later repaid, contributions set against another payment by the paying intermediary or contributions deductible at step 5 ITEPA 2003, s 54(1) in calculating the amount of a deemed payment under the normal IR35 rules.

The ‘underlying chain payment’ means the chain payment whose amount is used at step 1 of ITEPA 2003, s 61Q(1) as the starting point for calculating the amount of the deemed payment.

So for our Mark Ltd example, importantly, these rules apply whether the end-of-line remuneration is earnings of the payee, a distribution of the paying intermediary or takes some other form.

Bear in mind that the rules state that the paying intermediary and the payee can treat the end-of-line remuneration as reduced by the amount of the deemed payment. So, there is no double tax charge on Mark if money is taken as salary or dividend as long as the cash taken from the company (£65,000) does not exceed the amount of the deemed payment (£70,000).

In addition, Mark Ltd can reduce a salary of £65,000 by the deemed payment of salary of £70,000, so there is no need to operate a PAYE scheme in this specific example.

Alternatively, if the cash is taken as a dividend, Mark Ltd can use the trade deduction rules in CTA 2009, s 141A and ITTOIA 2005, s 164B.

When the person is the intermediary, a deemed direct payment is treated as made and the person receives a payment which can reasonably be taken to be in respect of the same services as those in respect of which the underlying chain payment is made, the deemed direct payment is not required to be brought into account in calculating the profits of the trade.

This seems to give Mark Ltd a corporation tax deduction for the £65,000 dividend.

On the afternoon 18 May 2018, one day before the Royal wedding, HMRC published a consultation document on extending the public sector rules to the private sector. The more cynical among us might have thought this was so the announcement might get lost in the press coverage.

HMRC seems to have spotted – after 18 years – that only 10% of PSCs that should be applying the rules are doing so, costing, according to HMRC, somewhere in excess of £1bn a year.

This consultation has now led to the publication of a further document on 5 March 2019 which gives more concrete suggestions as to the shape of the new rules ( The main proposals are as follows:

  • The new rules will apply from April 2020 and will use the off-payroll working rules in the public sector as a starting point (see Mark Ltd).
  • Clients will be required to determine a worker’s employment status and communicate that determination.
  • The smallest organisations will not have to determine off-payroll workers’ employment status.
  • The government intends to use the existing statutory definition within the Companies Act to determine whether a corporate client is small; in essence it will have to satisfy at least two of the following requirements – annual turnover not more than £10.2m, balance sheet total not more than £5.1m and no more than 50 employees. Similar rules will apply to unincorporated businesses.
  • The fee-payer, usually the organisation paying the worker’s PSC, will have to make deductions for income tax and National Insurance and pay employer’s National Insurance.
  • IR35 will continue to apply to off-payroll workers providing their services to small private sector clients after 6 April 2020.
  • Some changes to the public sector and consequently new private sector rules may include the possibility of passing unpaid PAYE and National Insurance down the labour chain if multiple intermediaries are involved.
  • There will be a framework for resolving disagreements over the employment status decisions for off-payroll workers.


Unfortunately, there appears little in the new consultation to address the fundamental issue that the status test is complicated. HMRC’s online employment status tool is not an accurate reflection of the law and seems heavily weighted in HMRC’s favour. Once the tool gives employment as the answer there is no way for the individual concerned to appeal. The only way they could attempt to buck the system seems to be to ignore the rules and force HMRC to raise an enquiry.

In addition, there appears no acknowledgment that the public sector rules have been widely misapplied and misunderstood, HMRC’s guidance on this whole area is out of date and overly-simplistic and what is really required is a blank page. Leaving small businesses out of the new rules is merely going to create more confusion and potential abuse.

It does not look as though the new rules are going to make the tax system any simpler. Further, it seems likely that the issue of disguised employment will continue to haunt the world of tax.

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