How is IR35 Taxed? A Compliance Guide for UK Businesses
With over 214,000 status assessments delivered across the UK, we know that navigating the financial complexities of the off-payroll working rules requires a clear understanding of how employment status dictates tax treatment. For hiring organisations, procurement professionals, and finance directors, misjudging these rules carries significant financial risk.
How is IR35 taxed?
Contracts caught inside IR35 are taxed as employment income, meaning Income Tax and National Insurance contributions are deducted and paid at source before payment in the same way a business treats an employee salary. Contracts deemed outside IR35 are paid gross, allowing the contractor to manage their own tax affairs.
When a determination places a contract inside IR35, the deemed employer must identify the "deemed direct payment". Then the process involves deducting PAYE tax, employee National Insurance contributions (NICs), and potentially the Apprenticeship Levy from the net invoice amount, and also calculating the employers' NICs, which are paid on top and cannot be deducted from the contractor's fees. Conversely, an outside IR35 status allows the contractor's company to receive gross payment, and employers' NICs are not due. Official data shows that getting this distinction right is critical, as non-compliance can trigger back-tax assessments and penalties.
Who is responsible for paying IR35 tax?
The deemed employer, typically the recruitment agency or the end client hiring the contractor, is legally responsible for deducting and paying inside IR35 taxes to HMRC. If the contract is outside IR35, the contractor's personal service company retains responsibility for its tax liabilities.
Under the off-payroll rules in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, default responsibility sits with the client, unless they have issued a Status Determination Statement to the worker and the party below them in the supply chain. When the SDS mechanism is exercised, the deemed employer moves from being the client to the party below them. However, if an investigation reveals that a business failed to apply reasonable care when determining the status or the purported SDS does not contain the necessary statutory criteria, it’s not an SDS, and the liability remains with the client.
For the above reasons, end clients are advised to take care with their determinations, ensure the statement they create meets the criteria to be an actual SDS, and that it is passed to both the worker and the party below them in the supply chain - then the client no longer has the tax risk.
Partner with the IR35 experts at IR35 Shield
Achieving total certainty on every assessment is vital to protect your cash flow and corporate reputation.
Partner with the industry experts at IR35 Shield; we’re here to support you and your business every step of the way. If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
