The rules only apply to “relevant engagements” – where an individual provides services to a client through an intermediary (a limited company) and, but for the existence of the intermediary, the income would be treated as that of an employee if the individual had contracted directly with the client.

Where there is IR35 income and it exceeds the worker’s salary (after certain expenses) the excess will be deemed to be salary subject to PAYE and NI in the tax year to 5 April. Failure to correctly account for PAYE and NI can result in significant penalties and interest.

The intermediary will be allowed to deduct certain expenses in respect of IR35 income specifically:

  • Expenses deductible as an employee
  • Company contributions to approved pension schemes
  • Employers NI
  • A flat rate of 5% of the gross income from relevant engagements

For each engagement, the question is whether the contract is in the nature of employment as far as the individual is concerned. Tests applied to determine whether an individual is employed or self-employed are used. The 3 main tests are:


A worker will not be an employee unless there is a right to exercise control over the worker. This may be a right to control what work is done, where or when it is done, or, how it is done. Actual control is not paramount; it is the right of control that is important.

The right to get a substitute or helper to do the job

Personal service is an essential element of an employment contract. A person who has the freedom to choose whether to do the job himself or hire somebody else to do it for him, or provide substantial help, is probably self-employed.

Mutuality of obligation

Within a contract there are various mutual obligations – the obligation to perform and be paid for performing would form part of any contract – but the mutual obligations needed for a contract of employment to exist consist of more than this, there needs to be obligation to offer and an obligation to accept future work.

Other considerations would be:

  • Provision of equipment
  • Financial risk
  • Basis of payment
  • Opportunity to profit from sound management
  • Part and parcel of the organisation
  • Right of dismissal
  • Employee benefits
  • Length of engagement
  • Intention
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