IR35: Labor law in the UK

IR35 is UK tax legislation aimed at preventing unequal tax and social security treatment of professionals ('contractors') who: (i) through an intermediary (with its own BV - this is also known as a Personal Service Company (PSC)) or otherwise work for a client and; (ii) would have been employees if they had provided the services directly to the client (i.e. without the intervention of an 'intermediary').

If this is the case, we are dealing with a pseudo self-employed person who is not entitled to tax benefits applicable to self-employed persons. The IR35 ensures that these professionals pay the same (wage) tax and national insurance contributions as employees.

Employment status qualification IR35

How does it work?

By performing an IR35 check on the hired professional, we can determine whether the professional should be considered an employee or self-employed for tax purposes. If the relationship is more like an employment relationship, the outcome is 'inside IR35'. If the professional qualifies as self-employed, the outcome is 'outside IR35'. The IR35 status is determined by a number of elements, but in particular by the presence of 'personal service', direction and supervision from the client, the bearing of financial risk by the professional and the reciprocity of obligations.

The tool 'CEST' (check employment status for tax) can be used to check whether IR35 applies. See: Check employment status for tax - GOV.UK

It is not mandatory to use the tool for status determination. The tool is only an aid.

What are the risks?

It is important that you comply with the IR35 rules. Failure to demonstrate that you have taken all reasonable measures ('Reasonable Care') may lead to financial consequences such as a subsequent wage tax and premium tax and any fines and interest imposed.

What has changed?

Before this, the professional who worked for a client through his company (PSC) was responsible for testing whether the relationship fell within or outside IR35. From April the 6th 2021, the responsibility for determining the 'employment status' of the professional lies with the 'end user' (client). To determine the status, the agreements with the professional are reviewed. In addition to determining the status of the professional, the following obligations apply for the client:

  • Demonstrate that all reasonable measures have been taken under the IR35 test from an IR35 perspective;
  • Sharing the assessment of the status of the professional (including substantiation) with the professional and other parties in the chain;
  • Maintaining a register of assessments and the fees paid;
  • Establish a procedure (complaints procedure) with a period of 45 days for the client to deal with objections from the professional (and/or other parties in the chain) regarding the assessment of his status;
  • Regularly checking and reviewing IR35 statuses to ensure they are up to date and remain so, and re-running an IR35 test if circumstances have changed.

Implications for practice

When a UK independent professional working through his own B.V. is hired, the following steps need to be taken:

Check whether the client company has an establishment in the UK (this may be a head office, branch office or a single branch office). Please note: even if the UK zp'er will perform work for a Dutch branch but this client also has a location in the UK, the client has 'UK presence' and the client is responsible for determining the employment status.

For more information, see the following website: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10006

Does the company have no establishment in the UK? Then the responsibility for determining the employment status remains with the professional.

If the client has an establishment in the UK, then check whether the client's company qualifies as a 'small company'. A small enterprise is an enterprise having two of the following characteristics: (i) annual turnover of less than £10.2m; (ii) a balance sheet of less than £5.1m; and
(iii) less then 50 employees.

For more information, see the following website: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10006

Does the enterprise qualify as a small enterprise? Then the responsibility for determining the employment status remains with the professional.

Does the client company not qualify as a 'small company' and does it have a branch in the UK? Then, as the client, you have to determine the employment status of the professional. The result of this is recorded and passed on to the
party making the payment (broker) and the professional.

For this use the 'Status Determination Statement' of HeadFirst Group.

If the status of the professional is 'within IR35' - then the contract is not settled. This means that the professional is a pseudo self-employed person and qualifies as an employee of the client. Discuss with your contact at HeadFirst Group whether other options are possible.