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October 22, 2022updated 25 Oct 2022 9:07am

What is IR35?

IR35, or intermediate legislation, was designed to prevent people from evading taxes. These 'disguised employees' usually register as limited firms in order for the employees to pay less tax.

By Silvia Pellegrino

IR35 refers to off-payroll working. It can affect clients, workers and their intermediaries.

The tax legislation was introduced in order to prevent individuals from avoiding paying taxes by offering their services to clients through a third party.

ing inside IR35 means that you are categorised as an employee of an end client and subject to Pay As You Earn (PAYE) rules. (Photo by Funtap/Shutterstock)

What does IR35 mean?

The intermediate legislation, or IR35, was initially presented to Parliament in 1999. Its goal is to prevent people from attempting to evade taxes by providing services to their clients through a limited corporation or third party.

The tax-avoiding individuals are also referred to by HMRC as “disguised employees,” meaning they register as limited firms in order for the employees to pay less tax rather than being listed as employees on payroll. 

This is because using contractors can help save the company a sizable sum of money since they are not responsible for covering employment perks like paid time off or pensions or paying employers’ National Insurance Contributions (NICs).

What do inside and outside IR35 mean?

Being inside IR35 means that you are categorised as an employee of an end client and subject to Pay As You Earn (PAYE) rules. There are some duties for this position, like paying the required taxes by keeping your employee status up to date as changes occur in the workplace dynamic.

It is the end client’s (employer’s) responsibility to ascertain and declare their employee’s status in the case of public sector contractors, generally using HMRC tools. In the case of contractors working for the private sector, it used to be the employee’s responsibility to register their own status, but this was altered in April 2021.

According to HMRC, if a person can pay their own salary while adhering to tax laws and is truly self-employed, they would be considered to be outside IR35.

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When IR35 regulations are followed, neither a company nor an employee will suffer consequences as long as the data is accurate.

How does IR35 affect the tech sector?

After its introduction, IR35 had a negative impact on the tech industry. In the digital world, it became more difficult to find experienced workers in the public sector because contractors might turn to the private sector to avoid falling inside IR35.

Programmers and other technical staff members who work in the information technology field frequently employ intermediaries. 

One of the major changes is that current IR35 regulations require anybody who offers services through the use of a Personal Service Company (PSC) to analyse the arrangements with the end client. Then they also must assess whether it would constitute employment if the services were delivered directly rather than through a third party, and use PAYE if so.

These regulations changed in 2021, from revolving around PSCs to end clients, resulting in numerous new administrative and tax reporting requirements for enterprises. For instance, if an employee delivers services to a medium or large-sized client outside the public sector, they should obtain a determination of employment status from the client, along with the reasons for it.

What are the IR35 reforms?

Originally, if the contractor did not have a PSC and acted as an employee of the client, the contractor’s PSC was required to report to HMRC for tax and NICs. Deciding which was preferable was the contractor’s obligation to determine.

However, these original regulations were changed in 2017 and 2021 after non-compliance became widespread, and as a result of the reforms, the end client assumed responsibility for determining whether a contractor was employed or self-employed.

Since April 2021, it has been up to public sector organisations and medium to large-sized private sector businesses that employ contractors to determine whether their relationship falls under IR35. SMEs were essentially thrown out of the picture by the 2017 and 2021 revisions because they were more likely to be subject to HMRC action to reinforce IR35 laws.

At the end of September 2022, former chancellor Kwasi Kwarteng announced a mini-Budget to unveil plans to help economic growth. 

Some of the elements of this proposal revolve around changes to IR35 tax rules, investment in tech start-ups and new low-tax investment zones. The mini-Budget’s focus was to reverse the IR35 reforms that came into place in 2021, as these failed to support individuals who worked as an employee but paid less tax than full-time staff members since they were registered as contractors. 

This reversal would have meant that employees would be in charge of determining their employment status and making sure they pay the appropriate taxes.

But Jeremy Hunt, the Chancellor of the Exchequer, has decided against moving forward with repealing the Off-Payroll IR35 reforms. It is still unclear from a Treasury statement why they are deviating from the previous chancellor’s plan, but the end goal is to keep the UK economically stable and keeping the previous IR35 reforms will save the Government’s Growth Plan around £2bn a year. 

The Treasury told Tech Monitor: “With or without the reforms, the underlying rules on off-payroll working are unchanged – anyone working like an employee should pay similar tax as someone who is directly employed.”


However, this means that businesses hiring IT contractors must also pay an additional 13.8% in taxes on top of the contractor’s agreed-upon compensation. Kwarteng “did the right thing and reduced unnecessary anxiety for enterprises as well as decreasing employer national insurance and pension costs on top of payroll admin time and cost,” said Tommy McNally, CEO of accounting firm Tommys Tax, in a statement to Tech Monitor.

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