Off-payroll, IR35, agency and umbrella rules - which apply to you?

Too many rules

The main thing that IR35 and the other rules have in common is that they were created to prevent individuals from avoiding PAYE tax and NI contributions. The trouble is that the various rules have been added to and tweaked so often, even tax experts struggle with them.

Why does it matter to HMRC?

The answer to the question is tax and NI avoidance. Employment income is liable to PAYE tax and both employees’ and employers’ NI contributions but if you can change the character of income from employment to profits from business you can reduce or avoid PAYE and employment-related NI and replace them with lower NI, and in some instances lower tax alternatives, e.g. dividends.

How does it work in theory?

Changing the character of income can be achieved by placing an intermediary between you and your customer, e.g. a company or agency, that contracts with your customer for the work. Because employment law says that only an individual can be an employee, when the intermediary is paid for the work you do it counts as trading income instead of employment income and PAYE tax and employment NI doesn’t apply.

Off-payroll or IR35. The off-payroll rules are merely a method of putting IR35 into practice where a range of conditions apply. They do not apply to all situations. In practice, you could work through a company you own (the intermediary) and have contracts with several customers. The IR35 main rule might apply to one contract, the off-payroll rules to another and the agency rules to both or neither. Note that an umbrella arrangement is one involving an intermediary shared with many other individuals rather than one set up specifically for you. The end goal of umbrellas is the same, as is the outcome where HMRC’s anti-avoidance rules apply, but the arrangements are more complex. We’ll look at these in detail in a separate article.

Know which rules apply before agreeing a contract for work. If it’s subject to the agency or off-payroll rules, your customer or the agency must decide this. They will deduct PAYE tax and NI from the fees it pays your intermediary for the work you do. If neither set of rules apply, then the decision on whether IR35 applies to a contract is down to you.

Why does it matter to you?

Whether any of HMRC’s anti-avoidance rules apply and who is responsible for deciding affects the net income you receive from a contract. If you don’t know that before you sign on the dotted line you might get a nasty shock when you receive your first payment from a customer. Plus, there are different (and often fiddly) bookkeeping issues where IR35 , off-payroll or agency rules are involved. You may therefore decide to use a professional bookkeeper rather than handle the task yourself. Finally, there’s a risk of double taxation where any of the rules apply. Preventing this requires special tax elections.