Tax Glossary


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Last updated on:
March 17, 2024

Off-payroll working involves earning income in ways other than through an employer's payroll system, common among self-employed freelancers or those who operate through their own limited companies. Instead of receiving pay via payroll, these workers issue invoices for their services.

The Significance of IR35 Legislation

IR35 is critical legislation designed to prevent tax avoidance by identifying 'disguised employment'. This situation occurs when a freelancer or contractor works in a capacity akin to an employee but is paid in a manner that minimizes their tax and National Insurance contributions. IR35 aims to ensure fair taxation by requiring that such workers and the companies hiring them pay appropriate employment taxes.

Implications for Off-Payroll Workers and Employers

Being off-payroll doesn't automatically exclude one from employee status under IR35. This legislation mandates that individuals who work like employees, despite being off-payroll, should be treated as employees for tax purposes. This distinction is crucial for both workers and their clients to avoid penalties.

Key Questions to Consider:

  1. Personal Service: Are you obligated to personally perform the work, or could someone else substitute in your place?
  2. Employment Tasks: Are you performing tasks that would typically be expected of an employee?
  3. Control: Does the client control the manner, timing, and location of your work?

Answering 'yes' to any of these questions might indicate that HMRC views you as a 'disguised employee', subject to employment taxes.

Tools and Resources:

HMRC's Check Employment Status for Tax (CEST tool) tool can help clarify the working relationship between a freelancer/contractor and their client, assisting in compliance with IR35.

Understanding off-payroll working arrangements and the IR35 legislation is essential for freelancers, contractors, and their clients to navigate the complexities of tax obligations effectively.

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