Intermediaries Legislation (IR35) - Working through an intermediary, such as a Personal Service Company

The circumstances in which the legislation applies

If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, and the intermediary does not meet the definition of a Managed Service Company, then the IR35 legislation may apply to engagements with that client.

Broadly, it applies to those engagements where –

• you personally perform services for another person (the client);
• the services are provided not directly with the client but under arrangements involving an intermediary; and
• the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner’s employment by the client.

In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income.

The intermediary must also satisfy certain conditions.

It is therefore necessary under the legislation to construct a hypothetical contract between the worker and the client based on all the circumstances including the terms and conditions of relevant contracts and the actual substance of the arrangements between the parties. Subject to meeting the other conditions, if that hypothetical contract would be one of service then the engagement is within the legislation.

The existing employment status tests are used to decide whether the hypothetical contract between the worker and the client would be a contract of service/employment. The courts lay down the criteria used to decide who is an employee. More information on the criteria to be used can at Employment Status.

Extended rules for NICs purposes

The IR35 NICs legislation is slightly different from the IR35 tax legislation in that it is not just those engagements involving a hypothetical contract of service that are subject to it.

Some earners are treated as employed earners for NICs purposes although for tax they may be self-employed. This means that certain engagements may be within the NICs intermediaries legislation but not the tax intermediaries legislation. Occupations that may be affected include lecturers, teachers, instructors or those engaged in a similar capacity in an educational establishment; office cleaners and cleaners in any similar capacity; and entertainers. The same is true of those holding non-executive directorships via a service company.