Definition
IR35
Off-payroll working rules for contractors supplied through intermediaries.
IR35, also known as the off-payroll working rules, is UK tax legislation determining whether a contractor working through their own company should be taxed as an employee for that engagement. Public sector clients are responsible for making the employment status determination, which affects how suppliers can structure contractor-based delivery teams.
Why it matters for public contracts
Since reforms in 2017, public sector bodies (rather than the contractor) are responsible for assessing whether an engagement falls inside or outside IR35, using HMRC's Check Employment Status for Tax (CEST) tool or equivalent assessment. This affects payroll and tax treatment for any contractors a supplier proposes to use on the delivery team.
This is a specialist area of tax law with financial and legal consequences for getting it wrong, and suppliers should seek advice from a qualified tax adviser or employment status specialist for any specific engagement rather than relying on general guidance.
What tenders and contracts typically require
- Confirmation of how the supplier manages IR35 status for any contractors on the account
- A commitment to cooperate with the buyer's status determination process
- Clarity on whether proposed team members are employees, contractors, or subcontracted staff
- Assurance that appropriate tax and National Insurance treatment will be applied
Frequently asked questions
- Who decides if a contractor is inside or outside IR35 on a public contract?
- The public sector client (the fee-payer's engager) is responsible for making the status determination, not the contractor or the supplier. This determination should be communicated in a Status Determination Statement, which the supplier should keep on file.
- Does IR35 apply to suppliers who only use permanent employees?
- IR35 specifically concerns individuals working through their own intermediary, typically a personal service company, rather than direct employees on standard payroll. If a supplier only ever uses permanent staff, IR35 determinations are generally not relevant, though this should be confirmed with a tax adviser if there is any ambiguity.
- What happens if an IR35 determination is wrong?
- Getting a determination wrong can create backdated tax and National Insurance liabilities, and responsibility can sit with different parties in the labour supply chain depending on the circumstances. Given the financial risk, specific professional tax advice should always be taken rather than relying on general assumptions.
Related terms