Compliance with the rules and guidelines of IR35 is very significant for the contractors. The onus to determine the status of IR35 of contractors in the public sector is on the hirer or the client for whom the contractor is working. In the private sector, this is the responsibility of the contractor or the limited company to justify its IR35 status. IR35 compliance is of utmost importance to avoid the penalties levied by the government.

If a contractor working for a client is found to be inside IR35, then he is liable to pay the tax on his income to the government as well as contribute to the insurance deductions. On the other hand, if he is found to be outside the IR35 gamut, then no such tax liability arises.

The three key factors that determine whether the contractor is a ‘deemed employee’ of the client or not are as follows:

Supervision: If there is someone who is overseeing the work of the contractors and monitoring the quality of their work, then the contractors are treated to be the ‘deemed employees’ of the client.

Direction: When the client-agency provides guidelines and issues directives as to how the contractor should do his work, this implies that the contractor is not self-employed. When the client has the authority to direct, this means the contractor will be deemed as his employee and would be liable for tax deductions under IR35.

Control: When the client retains complete control over the contractor, the contractor falls under the provisions of IR35 and should pay tax on his income to HRMC. One should consider the above factors while determining one’s IR35 status.