In an off-payroll working enquiry, HMRC is testing whether someone working through their own company should be taxed as an employee. Since 6 April 2021, where the client is in the public sector or is a medium or large private sector organisation, the client decides the worker’s employment status and the deemed employer carries the PAYE and National Insurance liability. Where the client is a small private sector organisation, the worker’s own intermediary decides, and the liability sits there instead.

The rules are still widely called IR35. HMRC’s own term is off-payroll working. The distinction that matters is not the name but who HMRC will bill if the status determination turns out to be wrong.

Who the rules apply to

Three groups are caught. Workers who provide their services through their own intermediary, usually a personal service company. Clients who receive services from a worker through that intermediary. And agencies or other suppliers who provide workers’ services through intermediaries.

An agency has responsibilities under the rules regardless of its size, particularly where it is acting as the deemed employer.

Who decides employment status

For public sector clients, and for medium and large private sector clients, the client is responsible for determining the employment status of the worker. That determination has to be made and communicated, and it is the client’s decision to defend if HMRC disagrees.

Where the client is a small private sector organisation, the position reverts to the older arrangement: the worker’s intermediary decides whether the rules apply.

Note that it is the size of the client that decides which regime applies, not the size of the contractor’s company.

Who pays if the determination is wrong

Where the rules apply and the worker is treated as employed for tax purposes, the deemed employer must deduct income tax and employee National Insurance from the fees paid to the worker’s intermediary. The deemed employer also has to pay employer National Insurance to HMRC, and the Apprenticeship Levy where it applies.

That is why an off-payroll enquiry can be expensive for an engager rather than for the contractor. The liability attaches to the party in the chain that carried the deemed employer obligation, and it attaches across every engagement that shares the same facts.

What an off-payroll enquiry involves

HMRC will typically want the contracts, the status determination statements, the process used to reach them, and evidence about how the engagement worked in practice rather than on paper. Substitution rights, control over how and when the work is done, and mutuality of obligation are the usual battlegrounds, and each of them is evidenced by working practices rather than by the wording of the contract alone.

That evidence gathering is the reason these enquiries are slow. It is not unusual for an off-payroll enquiry to run across multiple engagements and multiple tax years, with each round of correspondence prompting a further request for documents.

Why they are expensive to defend

Three features drive the cost. The volume of documents is high, because every engagement has its own contract and its own working practices. The analysis is legal as well as factual, because employment status is decided on case law rather than on a statutory test. And the exposure is cumulative, because one adverse determination applied across a population of contractors multiplies quickly.

The professional fees involved in defending an off-payroll enquiry are borne by the taxpayer. HMRC does not reimburse them, and a successful defence does not recover them.

Common questions

Does IR35 still exist?

Yes. The rules are now generally described by HMRC as the off-payroll working rules. Where the client is a small private sector organisation, the older arrangement still applies and the worker’s intermediary makes the status decision.

Who is liable for the tax if a determination is wrong?

Where the rules apply and the worker is deemed employed, the deemed employer deducts income tax and employee National Insurance from fees paid to the intermediary, and pays employer National Insurance and the Apprenticeship Levy where applicable to HMRC.

Does the size of my company matter, or the client’s?

The client’s. It is the client’s size that determines whether the client or the worker’s intermediary is responsible for the status determination.

When did the current rules start?

The reform for medium and large private sector clients took effect on 6 April 2021, having been delayed by a year because of COVID-19. The public sector rules came in earlier.

Does tax fee protection insurance cover an off-payroll enquiry?

It depends on the wording, and off-payroll cover is one of the areas where wordings differ most, so read yours rather than assuming. As with any enquiry cover, the check has to begin while the policy is in force. An enquiry that has already opened cannot be insured.

Related guides

This page explains how HMRC off-payroll working enquiries work. It is general information, not tax advice or employment status advice, and it does not describe the terms of any particular insurance policy. Status determinations turn on the specific facts of each engagement.

Solar Insurance Services (Medway) Limited is registered in England and Wales, company number 05439438, and is authorised and regulated by the Financial Conduct Authority, firm reference number 459582.

Sources: HMRC guidance “Understanding off-payroll working (IR35)”; HMRC guidance on off-payroll working for clients; HMRC guidance on deemed employer responsibilities under the off-payroll working rules.