IR35, or the "Off-Payroll Working Rules," is a UK law that makes sure self-employed people and employees pay similar amounts of tax. The rules apply to those who offer their service through their own companies, to decide (for tax purposes) if they’re actually employees of their own companies.
This guide summarises the IR35 rules and helps businesses in the screen sector understand what they mean and how to stay compliant.
IR35 is legislation that sets out the rules to decide whether a contractor or freelancer working through an employment intermediary should be treated as an employee for tax purposes. An intermediary is a person or business who arranges for someone to work for a third person), such as an agency or personal service company (a limited company that’s been set up by a single contractor to provide services to clients. They’re usually the only shareholder and director of the business). The main goal is to close the tax gap between people who work as employees and those who use a company structure to pay themselves differently.
If a contractor is classed as “inside IR35,” they are treated like an employee for tax purposes and must pay Income Tax and National Insurance through the PAYE system. If they’re “outside IR35,” they can remain self-employed, and the contractor remains responsible for managing their taxes through their limited company.
Your responsibility as a business is to determine whether your contractors are working inside or outside IR35. Here’s what the terms mean:
Inside IR35: The contractor is treated as an employee for tax purposes. Your business must deduct Income Tax and National Insurance contributions from their fees through PAYE. Additionally, you must issue a Status Determination Statement (SDS) explaining why the contractor is considered inside IR35.
Outside IR35: The contractor is considered self-employed for tax purposes. Your business is not required to deduct taxes or National Insurance Contributions (NIC) from their payments. Instead, the contractor handles their own taxes through their company.
HMRC looks at several factors to decide if a contractor is inside or outside IR35:
Right of substitution: Can the contractor send someone else to do the work? If no, they are more likely inside IR35.
Control: Does your business control how, when, and where the work is done? If yes, this suggests the contractor is inside IR35.
Mutuality of obligation (MoO): Are you obligated to provide ongoing work, and is the contractor obligated to accept it? If so, this indicates an employment relationship and places the contractor inside IR35.
HMRC assesses these factors by reviewing the contract terms and the actual working practices.
What Changed in 2021?
Since April 2021, medium and large companies are responsible for determining the IR35 status of contractors they hire. If a contractor is inside IR35, the company must:
Assess the IR35 status and issue a Status Determination Statement (SDS).
Deduct Income Tax and National Insurance through PAYE.
Small Companies Exemption
If your business is small (meeting two of these conditions: turnover under £10.2 million, fewer than 50 employees, or less than £5.1 million on the balance sheet), contractors are responsible for determining their own IR35 status.
From 6th April 2025, legislation will come into effect to increase company turnover and net assets thresholds by approximately 50%. This uplift in thresholds accounts for inflation since the previous thresholds were set and is also part of the government’s drive for more proportionate reporting. Companies able to move down a size category will be entitled to the accompanying reduction in reporting requirements. The following table shows the current company size thresholds and what the new thresholds will be from the 6th April 2025.
In the screen sector, many businesses rely on contractors, such as cinematographers, editors, and animators. Understanding IR35 ensures your business complies with tax laws and avoids penalties. Here are examples to illustrate:
Inside IR35: Your business hires a video editor to work on-site for six months, using your equipment and working under your supervision. This setup is likely inside IR35 because the editor is working like an employee.
Outside IR35: Your business engages a freelance sound designer who works remotely, sets their own hours, and uses their own tools. This arrangement is likely outside IR35 because the sound designer operates as a self-employed contractor.
To meet your obligations as a business, follow these steps:
Review Contracts: Make sure contracts accurately reflect the working relationship. For contractors outside IR35, include terms like the right of substitution and independence over how the work is done.
Use HMRC’s CEST Tool: HMRC’s Check Employment Status for Tax (CEST) tool can help you assess whether a contractor is inside or outside IR35. You can access the CEST tool here
Go to the CEST tool page.
Answer questions about the working relationship, including details about control, substitution, and mutuality of obligation.
Review the outcome provided by the tool. Save a copy of the results for your records.
Keep Records: Maintain records of contracts, correspondence, and working practices to support your IR35 decisions.
Seek Professional Advice: Consult with an accountant or legal expert for help navigating IR35 rules, especially for complex arrangements.
IR35 compliance is essential for businesses that engage contractors. By understanding your responsibilities, regularly reviewing contracts, and using tools like HMRC’s CEST, you can ensure compliance to avoid penalties. Penalties, which can include repayment of unpaid tax, National Insurance, and interest, as well as fines, may range from 0% to 100% of the unpaid tax depending on whether HMRC deems the non-compliance to be due to carelessness, deliberate error, or reasonable care:
0% if the business took reasonable care.
Up to 30% for carelessness.
Up to 70%-100% for deliberate underpayment.
For the screen sector, where short-term work is common, regularly reviewing contracts and working arrangements can help you stay compliant. By understanding the difference between inside and outside IR35 and following the steps in this guide, you’ll be better prepared to manage your tax responsibilities and protect your business. If in doubt, seek advice from a qualified professional.
Note: Material on this platform is not legal advice but we’re here to point you in the right direction if needed.