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Insights UK: Understanding IR35 – Criteria and how to assess employment status

UK: Understanding IR35 – Criteria and how to assess employment status

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​​​​​​​​​​​​​​​​​​​​published on 10 March 2025 | reading time approx. 2​ minutes​

    
IR35, also known as the off-payroll working rules, has been a hot topic for contractors and businesses since its introduction in 2000. In this two-part guide, Rödl & Partner’s UK Personal Tax team provide a breakdown of everything you need to know about IR35. This article – Part 1 – ​focuses on understanding the key criteria for determining employment status and how to assess whether IR35 applies to your contracts. Stay tuned for Part 2, where we’ll explore the latest changes to IR35 rules, including the significant updates coming in April 2025.


Grüne Ampel, blauer Himmel ​​

Determining employment status

In April 2021, the UK government introduced reforms requiring medium and large-sized private sector organisa­tions engaging contractors through personal service companies (PSCs) or other intermediaries to assess whether IR35 applies to contracts they enter into. Previously, contractors were responsible for determining their own status.
 
Where the IR35 rules apply, the organisation paying the PSC or intermediary must deduct income tax and National Insurance contributions (NICs) at source before making the payment and also pay employer’s NICs.
Misclassification can lead to significant tax liabilities, making it essential for businesses and contractors to understand the criteria used to assess IR35 status.
  

Key criteria for IR35 assessment

There are a number of different factors that are used to assess whether someone falls within the boundaries of IR35 or not. In short, these include:
  • Control – How much control does the client have over the contractor’s work, including when, where, and how it is completed? A high level of control suggests an employment relationship.
  • Substitution – Can the contractor send a substitute to perform the work? 
  • Mutuality of Obligation (MOO) – Does the client have an obligation to provide work, and does the contractor have to accept it? 
  • Financial Risk – does the contractor take on the financial risk of the arrangement?
  • Equipment and Integration – Employees are often provided with equipment and are integrated into the business, whereas independent contractors usually provide their own tools and operate separately. If a contractor is given a company laptop, uniform, or email address, this could indicate an employment relationship.
  • Payment Structure – Employees are generally paid a salary or hourly wage, whereas contractors often invoice for completed projects. 
  • Number of clients: A contractor with multiple clients is more likely to be considered self-employed.
  

Checking Employment Status Tool (CEST)

To assist with IR35 assessments, HMRC developed the Check Employment Status for Tax (CEST) tool following the 2017 public sector IR35 reforms. While the tool is widely used, it has been criticised for not fully considering Mutuality of Obligation, which can affect the accuracy of its determinations. Businesses and contractors are encouraged to use CEST as a guide but seek professional advice where necessary.
  
Conclusion
IR35 status determination is complex and requires careful contract assessment. Businesses engaging contractors should ensure compliance to avoid potential tax liabilities, while contractors should review their contracts to confirm they align with self-employment criteria. Using tools like CEST can provide guidance, but professional advice remains crucial in ensuring accurate IR35 assessments.

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