IR35: applying new HMRC guidance for intermediaries


IR35 expert Lesley Fidler, employment taxes specialist at Baker Tilly and member of the HMRC's IR35 Forum, assesses the pros and cons of the new guidance for contractors and tax advisers

On 17 June this year, HMRC published new IR35 guidance. It is one of several IR35 publications that have, or will, appear this year.

Although it was originally the reference number of an Inland Revenue Budget press release back in 1999, IR35 has remained the usual label for what the Income Tax (Earnings and Pensions) Act 2003 refers to, in Chapter 8 of Part 2, as the Application of Provisions to Workers Under Arrangements Made by Intermediaries, and to which the social security code devotes an entire statutory instrument (SI 2000/727), entitled the Social Security Contributions (Intermediaries) Regulations 2000. 

If the legal entities in the contractual chain between the individual worker and the end user of the worker’s services were to be removed and a contract imagined between worker and end user, would that contract be one of employment or self-employment?

If it would be an employment relationship, then the deemed employment payment rules would ensure that HMRC received broadly the same amount in PAYE and Class 1 national insurance contributions (NICs) as if the worker had been hired as a direct employee.

Why? Because workers were perceived to be setting up limited companies through which they contracted to work in roles that would otherwise be employment. Instead of receiving employment income, with its associated PAYE and Class 1 NICs, they were paying themselves in dividends: the absence of NICs alone making this a considerably cheaper option than employment.

Abolish IR35?

An operational flaw in the structure of the legislation is that not only each worker, but each contract that the worker’s personal service company enters into, has to be considered separately to determine whether it is caught by IR35 or not.

The Office of Tax Simplification (OTS) had suggested the abolition of IR35 but this was, and still is, not a proposition that the government wishes to consider – other than to dismiss it on grounds of ‘fiscal risk’, ie, loss of income (see paras 2.14 and 2.17 of Cm 8878).

It was against this background that the IR35 Forum was set up in 2011 to bring representatives from professional bodies such as the CIOT, ICAEW and ACCA together with industry representatives from contractors’ associations and HMRC policy and operational staff working with IR35.

The Forum’s remit is ‘to advise on improvements in the administration of IR35 and in a transparent manner to assist HMRC in:

  • identifying specific areas for improvement in the administration of IR35;
  • developing an overarching strategy for dealing with the administration of IR35;
  • designing specific approaches and steps within the overarching strategy;
  • identifying and agreeing measures of success against which to judge improvements;
  • monitoring the implementation of the new strategy and progress against agreed measures of success; and
  • reporting on progress in implementing improvements to the administration of IR35.’

New guidance

The new IR35 guidance issued in June was not intended to introduce policy changes that had not already been made – although some of the content may not previously have been well-publicised. It was the output of the enforced migration of the HMRC online pages to

For various reasons, in part because tax material has turned out to be more detailed than other areas on, the migration of the IR35 guides has been deferred, but regardless the material was published.

Key to the revised guidance are ‘user-need stories’: a requirement of www’ and intended to produce a customer-focused product. Such a story might be ‘As an inexperienced contractor, I need to develop an understanding of IR35 and decide whether it affects me so that I can ensure I am meeting my legal obligations’.

Convincing freelancers that any contact with HMRC is confidential is definitely a challenge: possibly one that is insurmountable 

Initially 17 of these were identified and grouped into the categories that have become the user guides. As a result, what had become an online repository for IR35-related documentation is now far more accessible. 

What is IR35?

The first of the user guides explains what IR35 means in terms that are aimed at those without specialist tax knowledge. It points out that ‘if you work through an intermediary, you might be known as self-employed, freelancer, consultant or contractor’ and that ‘whether IR35 applies is determined by the facts of each engagement and not by any label, description or job title’. All good stuff if it is both read and applied by those whom it affects.

Who does IR35 affect?

The second guide, ‘How to work out if IR35 affects you’ includes a section on the ‘Consequences of ignoring IR35’ pointing out that interest and penalties may be charged and concluding with a nudge that ‘it’s your duty, as a director of your limited company or member of a partnership to ensure compliance with all relevant legislation and take responsibility for determining whether IR35 is relevant to your business or not’.

It also links to the Business Entity Tests (BETs) which have been around for over two years. Forum members put a considerable amount of time and effort into formulating them, but they seem to be little-known.

Answering the test questions in relation to a business (rather than a single engagement) produces a numeric score which defines the level of risk of the business being the subject of an IR35 enquiry. The BETs have continued to divide opinion among Forum members. HMRC has insisted that they should not be capable of manipulation: industry representatives believe they set the bar too high in some situations.

Specific IR35 situations

The third guide has the title ‘How IR35 applies to you’ and addresses specific situations such as intermediaries located outside the UK, non-resident end-clients and relief for double taxation due to international work. It also covers ‘IR35 applied but you didn’t operate it’ and ‘Impact of ignoring IR35’, including the reminder that ‘penalties are more severe if it can be proved that you’ve knowingly ignored the legislation’.

Deemed Employment Payment (DEP)

The fourth guide sets out how to calculate and pay the deemed employment payment (DEP). This is the part of IR35 that seems to be ignored by the mainstream press when they conclude that the use of a personal service company can only indicate improper tax avoidance.

It links to the HMRC ‘Deemed employment payment calculator’ and to the HMRC Employment Status Manual pages that detail the calculation steps. Both are useful sources of information as long as they are acted upon before the end of the tax year to which the income relates.

Well-organised and/or well-advised freelancers are unlikely to need a deemed employment payment, either because they are not caught by IR35 or because they have addressed the issue in advance and taken a salary (and operated real time information (RTI)) throughout the year.

The freelancer who decides to pull his or her tax return material together sometime after the end of the tax year is the one who will have missed the DEP deadline and may therefore decide, on erroneous grounds, that it does not apply.

Contracts and IR35

The fifth guide is concerned with the contracts that govern IR35 situations and states HMRC’s position that ‘a “right to substitution” clause in your contract will only be accepted by HMRC if it is genuine. HMRC doesn’t accept that the right exists if the client’s permission must be obtained before sending a substitute’.

Fortunately, security reasons are not a barrier and the need for the substitute to have suitable qualifications and experience is also acknowledged.

Guide five states that in HMRC’s view ‘there’s no such thing as an IR35-proof contract’

The common situation where the subcontractor identifies a substitute, whom the end-user pays directly and not via the substitute, is not regarded as sufficient to indicate the absence of personal service.

The guide also covers the situation where a contract is not with a client but with an agency or employment business. HMRC will normally require a copy of the written contract but, if this is not available, all is not lost as HMRC gives the option of providing ‘alternative evidence’.

Since personal service can be a single deciding factor in employment status, this guidance on substitution provides clarification of HMRC’s current view.

Contract reviews service

This guide links to HMRC’s IR35 Contract Review Service: described as the free and confidential service where HMRC gives an opinion on the information supplied to it in relation to a particular contract. Convincing freelancers that any contact with HMRC is confidential is definitely a challenge: possibly one that is insurmountable.

The fact that only 80 contract review requests were made in the year to 31 March 2013 indicates that the service is not a threat to other providers of IR35 advice.

Whatever may be asserted to the contrary elsewhere, this guide states that in HMRC’s view ‘there’s no such thing as an IR35-proof contract’. Will this be sufficient to dissuade enterprising tax planners from continuing their quest?

IR35 enquiries

The final guide covers HRMC’s IR35 enquiries. A criticism of IR35 at the time the Forum was set up was the time that it could take for an IR35 enquiry to reach a conclusion. Since then, a new compliance approach has been introduced.

It is intended to provide a consistent experience for those involved and to try and maintain momentum by using tools such as information power notices (Schedule 36, Finance Act 2008) when delays appear.

HMRC cannot tell whether the delay is caused by the complete failure of either the agent or worker to address its questions or if it is the result of genuine issues, and so its issue of information notices persuades some and infuriates others.

The guide includes the assurance that if HMRC accepts that the business is in the BET low risk band, or that IR35 does not apply, then ‘HMRC won’t check again whether IR35 applies to you for the next three years as long as the information you’ve given HMRC is accurate and your circumstances – and in particular your working arrangements – don’t change in that time’.

HMRC would like face-to-face meetings in IR35 enquiries, but the lost opportunity cost for the worker and the reluctance of some advisers means they are not always held.

Does the new guidance work?

Any attention and re-ordering are likely to produce a better result. With the discipline of considering the user’s needs instead of the provider’s, the guidance ought to enable those who wish to research the area to understand how IR35 affects them.

Guidance, though, is not the only issue. The existence and application of IR35 need to be publicised to those whom it affects.

If an individual does not choose to engage with the information that is available, it does not matter how well-produced that information is. There needs to be a reason to comply: fear of being caught, for example.

The House of Lords Select Committee on Personal Service Companies reported ‘Her Majesty’s Revenue & Customs did not convince us that the resources currently allocated were sufficient to ensure compliance with the IR35 legislation’ (see para 2.31 of Cm8878).

It would be unusual for an individual to decide to volunteer more tax than those around him are paying in similar circumstances. If a freelancer knows no-one who is making a DEP or who has been the subject of an IR35 review that resulted in any payment, there is little incentive to ‘volunteer’ what appears to be unnecessary tax and NICs.

So, for those who know that they need to know about IR35, the new user guides should help. But for the non-compliant, their awareness of the issue needs to increase. Consequently there remains plenty for HMRC, supported by the IR35 Forum, to do.

Note: these are personal views and do not necessarily reflect those of the IR35 Forum

IR35: the key changes

  1. IR35 information is moving from HMRC’s website to
  2. IR35 guidance has been completely rewritten to reflect the needs of different types of user
  3. The Business Entity Tests are easier to find – but they are no more than an overall risk measure
  4. HMRC’s IR35 Contract Review Service remains little-used
  5. HMRC is working IR35 enquiries more quickly and, as far as possible, to a standard process

Does IR35 apply?

If you supply your services through an intermediary, you must work out which of your contracts and work engagements are affected by IR35.

If IR35 applies, you must:

  • calculate the deemed employment payment and your intermediary must pay any tax and NICs due on it to HMRC at the end of the tax year
  • reassess your IR35 status if your contracts change
  • take into account the deemed employment payment when paying corporation tax or making distributions
  • report information about IR35 on your self-assessment return

IR35 can apply to many different circumstances, for example, whether you are:

  • abroad
  • working in the construction industry
  • an office-holder
  • working with your partner or spouse
  • a charitable organisation

Source: HMRC

Further information

The new IR35 guidance, Intermediaries Legislation (IR35) – working through an intermediary, such as a personal service company, published in June 2014, is available here


Lesley Fidler is associate director, Baker Tilly Tax and Accounting, and the CIOT member on HMRC’s IR35 Forum

Lesley Fidler |Tax director and employment taxes specialist, RSM

Lesley Fidler CTA is an employment taxes specialist at RSM, formerly known as Baker Tilly in the UK. She is a member of the CIOT’s...

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