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    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Being an employer → IR35 client-side determination

    IR35 / Off-Payroll Working — Client-Side Determination (Chapter 10 ITEPA 2003)

    Chapter 10 ITEPA 2003 (post-April 2021 reform) makes medium and large clients responsible for determining the IR35 status of contractors engaged via a Personal Service Company (PSC), and — if 'inside IR35' — for applying deemed direct payment (PAYE + NIC) on the fee paid to the PSC. Small client exemption: clients below 2 of 3 thresholds (turnover £15m / balance sheet £7.5m / 50 employees — Companies Act 2006 thresholds, updated April 2025+) — Chapter 8 applies instead (the PSC self-determines under the original 2000 IR35 regime). The end-client must issue a Status Determination Statement (SDS) to the contractor + any agency. The fee-payer (usually agency, or end-client if direct) deducts PAYE + employee NIC + accounts for employer NIC + Apprenticeship Levy. Liability transfers to end-client if SDS not issued or not exercised with reasonable care.

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    In plain English

    Two parallel IR35 regimes exist. (1) Chapter 10 — applies when the end-client is medium/large; the END-CLIENT determines IR35 status + the FEE-PAYER (usually agency) applies PAYE/NIC if inside IR35. (2) Chapter 8 — applies when the end-client is small; the PSC self-determines + accounts for IR35 internally under the original 2000 IR35 regime. The small-client test uses Companies Act 2006 thresholds: turnover ≤£15m, balance sheet ≤£7.5m, employees ≤50 — must fail 2 of 3 to be small. These were updated from April 2025 (previously £10.2m / £5.1m / 50 — the FA 2025 changes raised the turnover + balance sheet thresholds for company-size classification). Test based on previous financial year. Process for medium/large clients: (a) end-client determines status using CEST tool + facts of engagement; (b) issues Status Determination Statement (SDS) to contractor + any agency in the chain; (c) if inside IR35, fee-payer deducts PAYE + employee NIC + employer NIC + Apprenticeship Levy from the gross fee — the contractor receives net; (d) if outside, fee continues to flow gross to PSC. Liability: starts with end-client. Transfers down chain when SDS issued. Returns to end-client if SDS not issued or status determination not made with 'reasonable care'. Disagreement: contractor can challenge; end-client has 45 days to respond with reasoned reconsideration. CEST is HMRC's tool but non-binding (~80% of usages result in a determination, ~20% inconclusive). Many engagers also use commercial alternatives (IR35 Shield, QDOS) which they consider more nuanced.

    How it works

    Identify which Chapter applies

    Test end-client's size against Companies Act 2006 thresholds (from 6 April 2025: turnover £15m / balance sheet £7.5m / 50 employees — fail 2 of 3 = small). If small → Chapter 8 (PSC self-determines). If medium/large → Chapter 10 (end-client determines).

    Status Determination Statement (SDS)

    End-client issues SDS to contractor + agency before first payment. Must contain: status conclusion (inside/outside IR35); reasons for conclusion; signature/date. Must be issued + based on reasonable-care determination. Failure to issue OR failure of reasonable care → liability remains with end-client.

    Inside-IR35 mechanics (deemed direct payment)

    Fee-payer (agency in agency chain, else end-client) calculates 'deemed direct payment': gross fee − VAT − allowable expenses. Treats DDP as employment income → deducts PAYE + employee NIC. Pays employer NIC + Apprenticeship Levy. Reports via FPS. Contractor's PSC receives net of these deductions; PSC accounts for VAT separately.

    Outside-IR35

    Fee flows gross to PSC. PSC accounts for VAT (if registered) + Corporation Tax + (if director takes salary/dividend) PAYE/dividend tax. End-client + agency have no PAYE obligations re the PSC fee.

    CEST tool

    Free HMRC online tool. Inputs: control + substitution + mutuality + financial risk + integration. Output: inside / outside / unable to determine. HMRC will stand by CEST results IF answers are accurate. ~80% determinative outcomes historically; high-court cases highlight CEST's limited handling of mutuality (PGMOL [2024]).

    Disagreement process

    Contractor (or fee-payer) can challenge SDS within 45 days. End-client must respond within 45 days with reasoned reconsideration. Until resolved, original SDS applies. No formal appeal beyond that — but FTT/UT route available if HMRC subsequently challenges.

    Public sector + 5% allowance abolished

    Public sector Chapter 10 has applied since 6 April 2017. The 5% expenses allowance previously available to PSCs operating inside Chapter 10 was abolished from 6 April 2017 (public sector) + never existed for private-sector Chapter 10.

    Who this applies to + key conditions

    Statute + manual references

    Primary: Income Tax (Earnings and Pensions) Act 2003 Chapter 10 (off-payroll working — public sector from 6 April 2017; private sector from 6 April 2021) + Chapter 8 (small-client IR35, original 2000 regime).

    Related: Finance Act 2020 — Chapter 10 private-sector extension to 6 April 2021; Companies Act 2006 ss.382-384 — small company thresholds (used for IR35 small-client test); Finance Act 2025 — uplift of company-size thresholds from 6 April 2025; Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689)

    HMRC manual: Employment Status Manual (ESM3000+ off-payroll working); Off-Payroll Working Manual (legacy)

    Case law: Atholl House Productions [2022] EWCA Civ 501 — Kaye Adams; emphasis on Ready Mixed Concrete framework + in-business-on-own-account test; Kickabout Productions [2022] EWCA Civ 502 — Paul Hawksbee; PGMOL v HMRC [2024] UKSC 29 — mutuality of obligation + control in football refereeing context

    Common mistakes + traps

    Worked example

    Kappa Plc (turnover £50m), engages PSC contractor Lila on 6-month £600/day project deemed inside IR35

    Kappa Plc engages Lila Ltd (Lila's PSC) for 6 months at £600/day. Kappa is medium/large (above all 3 thresholds). Kappa's status determination: inside IR35 (control + mutuality + integration into team). Engaged via agency Mu Resourcing Ltd.

    1. Step 1 — Kappa issues SDS to Lila + to Mu agency stating 'inside IR35; reasons: full control, no right of substitution exercised, integrated into Kappa product team, no financial risk.'
    2. Step 2 — Mu is the fee-payer. For each invoice from Lila Ltd, Mu calculates Deemed Direct Payment.
    3. Step 3 — Lila Ltd invoices £600 × 20 days = £12,000 + £2,400 VAT = £14,400 gross.
    4. Step 4 — Mu strips out VAT (Lila accounts for VAT separately) → DDP base £12,000.
    5. Step 5 — Mu deducts PAYE (basic rate ~£2,800 assuming higher-rate band reached) + employee NIC ~£420 = ~£3,220 deducted.
    6. Step 6 — Mu pays employer NIC 15% × (£12,000 − pro-rata threshold) + Apprenticeship Levy 0.5% — typically ~£1,650 absorbed at agency margin or passed up to Kappa.
    7. Step 7 — Mu pays Lila Ltd: £14,400 − £3,220 = £11,180 (including £2,400 VAT which Lila accounts for on its VAT return).
    8. Step 8 — Lila in turn: PSC receives £8,780 net of VAT. Lila's PAYE/NIC already deducted — director takes net amount as further salary/dividend (no further PAYE on the slice; potential dividend tax planning).

    Outcome: Lila receives substantially less than her gross £14,400 invoice after PAYE/NIC + employer NIC funded by agency. Determination shifts roughly 25-30% of gross to HMRC. The 5% expenses allowance has been abolished — no relief available to soften the impact.

    How this connects to the rest of the framework

    Employee vs worker vs self-employed →

    IR35 status determination uses the same Ready Mixed Concrete / Autoclenz framework as employment status.

    RTI mechanics →

    Inside-IR35 fees flow through FPS as deemed direct payment — fee-payer's PAYE responsibility.

    Employer NICs 2025/26 →

    Inside-IR35 attracts employer NIC at 15% + Apprenticeship Levy where threshold met.

    CIS for contractors →

    CIS subcontractors are not within IR35 (different regime); construction PSCs can still fall within IR35 separately from CIS.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    What are the small-client thresholds from April 2025?+
    Companies Act 2006 thresholds as uplifted by FA 2025: turnover £15m / balance sheet £7.5m / 50 employees. Small = fail 2 of 3.
    Who is liable if no SDS is issued?+
    The end-client — liability remains with the entity that should have determined status. Issuing SDS + reasonable-care determination shifts liability to fee-payer down the chain.
    Is CEST binding on HMRC?+
    HMRC will stand by CEST output if answers were accurate. CEST has known weaknesses on mutuality (PGMOL [2024]) — some engagers supplement with commercial tools.
    Does IR35 apply to CIS subcontractors?+
    Different regimes — CIS subcontractors fall under CIS rules; IR35 applies to engagements via intermediary PSCs. A construction PSC contractor can be inside IR35 (rare but possible).

    Free + regulated-body resources

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