The extended off-payroll worker rules, referred to here as the “IR35 rules”, came into effect on 6 April 2021. The rules marked a seismic shift for organisations that employ individuals through intermediary organisations by placing responsibility on the organisation to account for certain tax deductions to HMRC.
While the changes were introduced some four years ago, now is a good time for a reminder of the obligations. With the Employment Rights Bill on the horizon introducing significant additional rights for employees, organisations might be tempted to put an intermediary between them and those working for them in order to reduce the risk posed by those additional rights. This blog serves as a reminder that, from HMRC’s perspective, organisations might still maintain a degree of tax liability unless they can satisfy themselves that off-payroll workers are genuinely self-employed. This blog also discusses HMRC’s recent update to its Check Employment Status for Tax (CEST) tool.
What are the IR35 rules and to whom do they apply?
The purpose of the IR35 rules was to reduce the number of off-payroll workers (referred to here as “contractors”) who regarded themselves as self-employed but were, in fact, employees (and should be taxed as such). This was achieved by placing the responsibility for determining the employment status of a contractor with the organisation receiving the contractor’s services.
The IR35 rules apply to all organisations with a UK connection that are “medium” or “large” and that employ a contractor to perform work personally through an intermediary. “Small” entities are exempt. In general, an entity is considered “small” if any two of the following three criteria apply:
- annual turnover of no more than £10.2 million (£15 million for financial years beginning on or after 6 April 2025);
- balance sheet total of no more than £5.1 million (£7.5 million for financial years beginning on or after 6 April 2025); and
- no more than 50 employees.
The IR35 rules are targeted at working arrangements which involve intermediaries acting as the contractor’s personal entity. Most often, this will be a company that the contractor controls, often referred to as a “personal service company” (PSC), in which the contractor has a “material interest” (generally a 5% shareholding in the company, the right to 5% of company dividends or the contractor has a non-material interest).
Status determinations
If your organisation is a medium or large organisation and has a contractor that works through a PSC, you will need to make a status determination for tax purposes.
The purpose of a status determination is to assess whether, but for the existence of the intermediary, the contractor would have been an employee of an organisation. If so, the employing organisation will be the “deemed employer” and is responsible for deducting income tax, national insurance contributions and accounting for these to HMRC, together with employer NICs and apprenticeship levies (if relevant). PAYE must be operated on the amount of the payment made by the deemed employer. This will usually be the fee invoiced by the intermediary, net of VAT. The deemed employer may also, if it so chooses, deduct expenses that would be tax-free if paid to an employee (such as free or subsidised meals provided on their premises).
The organisation must take reasonable care when making the status determination and must complete it prior to the first payment being made under the contract. If the organisation fails to provide a status determination status, or if it fails to take reasonable care in making the status determination, it will be treated as a deemed employer. There is no prescribed format for the status determination. If the CEST test has been used (see more below) HMRC will accept the results of the test however alternative formats will be accepted.
What is the correct status?
While not identical, the test for “status determination” for IR35 purposes is very similar to that of general employment law. As has been well documented, recent years have seen multiple cases on the question of employment status determination. To briefly summarise, courts will look at the reality of the contractual situation and examine:
- Mutuality of obligation – the contractor agrees to perform work personally, in consideration for a wage;
- Control – the employing organisation has a sufficient degree of control over the contractor. HMRC guidance notes that control should be considered in terms of what the contractor has to do as well as where, when and how the work is to be carried out; and
- Other factors – the other provisions of the arrangement are consistent with a contract of employment. HMRC has guidance on several factors including: integration into the organisation, the taking of financial risk and who provides the equipment.
A worker can make representations to the employing organisation that the status determination is incorrect. The organisation must respond within 45 days to either confirm its original decision and give reasons for doing so or reverse the decision.
For more on the status of employees generally, please see our previous blogs Uber case reaches its final destination and Employment status post-Uber: plying for consistency.
Assistance of organisations – the CEST Tool
In order to assist with the status determination process, HMRC has published extensive guidance in its Employment Status Manual and encourages the use of its on-line CEST tool. This interactive questionnaire is a good starting point to ascertain whether a contractor is a deemed employee under the IR35 rules (although it has been subject to heavy criticism). HMRC has stated that, provided the tool is used correctly, the information is accurate and it is provided in accordance with its guidance, HMRC will stand by the decisions given by CEST.
The CEST tool was updated in April 2025 to address previous criticism that the tool did not enquire whether a contract is or would be in place. If the user answers no, then they cannot proceed with using the tool. HMRC’s update guidance notes that without a contract and mutuality of obligation there can be no contract of any kind – but notes this is not a change of the position.
While the updated CEST tool will undoubtedly prove useful, it might not be a panacea in every case. It might give an inconclusive or unanticipated result. If this does occur, or if there are complicated factual circumstances, the organisation should seek specialised, tailored advice. This is particularly the case given the potential tax liability if a contractor is designated as being off payroll but later found to be equivalent to an employee.
Even if the CEST tool is conclusive that an organisation is a deemed employer, there might be other considerations to be aware of. While being a “deemed employer” for IR35 purposes does not automatically confer employment rights on the individual, a “self-employed” relationship that closely resembles employment is capable of being reclassified. Again, organisations should be alive to this risk and seek specialist advice.
With thanks to Alex Evans, current trainee in the team, for his help preparing this blog.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2025
