What is IR35 and Its Impact on Your Business

IR35 legislation can significantly influence how you work with contractors and manage your payroll.  If you operate or are involved with a business that engages contractors then it’s really important that you fully understand what IR35 is, how it affects your operation and how to stay compliant to avoid being on the receiving end of an unwanted penalty.

At Blue Skies we have over 20 years of experience working with companies & individuals across all areas of media (and other industries). This means that we know how to keep your financial wellbeing secure and minimise your risk with HMRC - this includes navigating the world of IR35. Speak to our team on 01767 699996 or thecrew@blue-skies.tv for a no-obligation chat and find out how we can help you.

The Basics of IR35

Intermediary Regulations 35 (IR35), also known as off-payroll working rules, is a set of tax legislation in the UK that is designed to combat instances of tax avoidance by workers that are supplying a service through an intermediary, such as a Personal Service Company (PSC), who might otherwise be an employee.
The rules are in place so that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees.

Before the introduction of IR35, individuals providing their service through the means of a PSC (or similar) were able to take advantage of certain tax benefits, such as having a wider scope of allowable tax deductions, that are not applicable to PAYE individuals.

Determining the Employment Status

Whether the IR35 rules apply depends on the employment status for tax purposes of the worker. An Intermediaries Status Determination Statement (SDS) assesses if the contract is inside IR35 (treated as an employee for tax purposes) or outside IR35 (remains a self-employed contractor). Key factors include control, supervision, substitution, and whether the contractor supplies their own equipment.

The Effects on Payroll and Tax Liabilities

If a contract is determined to be inside IR35, the fee-payer, which could be the end client, an agency, or another third party, needs to deduct Income Tax and National Insurance contributions before they pay the contractor’s PSC. This can have significant effects on the net income of the contractor and the administrative workload for businesses. For small businesses, compliance is just as critical, although different rules apply depending on the turnover, balance sheet total, or employee count.

Adapting to IR35 as a Business

If you’re a business engaging with contractors, you must understand and adapt to IR35 to ensure compliance and avoid the costly consequences of non-compliance.

Complying with IR35

Understanding your Role: If you're a medium or large business, the responsibility to determine the employment status of a worker falls on you, the hirer, as per the off-payroll rules. This means you must assess whether the contractors you engage with, through their PSCs or otherwise, are essentially 'deemed employees' or genuinely self-employed.

  • For agencies, understand that while you may facilitate the placement of contractors, the end client usually carries the burden of determining the IR35 status.

  • Small businesses are exempt, provided they meet two or more of these criteria: annual turnover not more than £10.2 million, a balance sheet total of not more than £5.1 million, or not more than 50 employees.

Documentation and Process: Develop a robust process to assess and document each contract against IR35 rules, considering factors like control, substitution, and mutuality of obligation.

  • Implement IR35 Compliance Practices:

    • Use HMRC's Check Employment Status for Tax (CEST) tool.

    • Keep comprehensive records of your decision-making process.

    • Ensure contracts reflect actual working practices.

Consequences of Non-Compliance with IR35

Legal and Financial Repercussions: Failing to comply with IR35 can lead to substantial penalties from HMRC, including back taxes, National Insurance contributions, interest, and fines. For PAYE (Pay As You Earn), the taxes not originally deducted could also become the responsibility of your business.

  • Example of Risk Exposure:

    • If a deemed employee is not correctly classified, as a hirer, you might have to offset any unpaid taxes against your business's tax liabilities.

Best Practices for Business Owners

Develop Clear Policies: As a business owner, it’s important to maintain clear, consistent policies and provide education for those involved in engaging contractors.

  • Regularly review your contracts and working practices.

  • Maintain open communication with your contractors about IR35 compliance.

Work with Professionals: Seek professional advice on IR35 legislation and consider partnering with reputable companies to mitigate risk.

  • Partner Selection: Choose partners, such as limited companies or umbrella companies, that have a track record of IR35 compliance.

  • Dividends and PAYE: Understand the tax implications of paying dividends versus salary to align with the correct tax treatment under IR35.

If you or your business are new to the world of IR35 then we highly recommend that you understand the above and create your own internal checks & processes to ensure that you remain compliant at all times. Unfortunately, whether through an error or not understanding how to be compliant, any mistakes in meeting IR35 can, and likely will, be met with a penalty or fine.


For a no-obligation chat to find out how the Blue Skies team can help your business & financial wellbeing grow, contact us today on 01767 699996 or thecrew@blue-skies.tv.

Cameron Sykes