IR35 and Off-Payroll Working: Understanding Your Risk Profile

Since April 2021, medium and large businesses have been responsible for assessing the employment status of contractors operating through personal service companies (PSCs) and, where IR35 applies, accounting for PAYE and National Insurance contributions (NIC).

Having advised organisations across a wide range of sectors, we continue to see several recurring risk areas that can create significant tax exposures, including:

• Companies inadvertently moving outside the small company exemption
• Uncertainty around responsibilities within complex labour supply chains
• Overseas contractors undertaking UK workdays
• Over-reliance on HMRC's Check Employment Status for Tax (CEST) tool
• Directors invoicing their own companies for consultancy services

IR35 continues to be a key focus during due diligence reviews, with serious non-compliance capable of influencing deal value, transaction timelines, and acquisition outcomes.

Small Company Exemption Risks

The off-payroll working rules do not apply where the engaging company qualifies as "small" under the Companies Act criteria.

From 6 April 2025 a company must satisfy at least two of the following conditions:

• Annual turnover not exceeding £15 million
• Balance sheet total not exceeding £7.5 million
• No more than 50 employees on average

Prior to this a company would have needed to satisfy at least two of the following conditions

• Annual turnover not exceeding £10.2 million
• Balance sheet total not exceeding £5.1 million
• No more than 50 employees on average

In these circumstances, responsibility for assessing IR35 and accounting for any PAYE and NIC liabilities remains with the PSC.

However, issues frequently arise when businesses grow beyond these thresholds or fail to consider the position across the wider group. The company size test applies on a group-wide basis and can include overseas entities. In complex corporate structures, businesses may inadvertently fall within the off-payroll working rules without realising it.

Supply Chain Complexity

Where an end client contracts directly with a PSC, responsibilities are generally straightforward. However, complications often arise where agencies or multiple intermediaries sit between the contractor and the end user.

A common misconception is that responsibility automatically transfers to the agency or fee-payer. However, where the end client is not exempt as a small company, it remains responsible for undertaking employment status assessments and issuing Status Determination Statements (SDSs).

Failure to meet these obligations can leave the end client exposed to PAYE and NIC liabilities, even where payments are made elsewhere in the supply chain.

Overseas Contractors

Cross-border engagements can create additional risks beyond IR35 itself.

Where contractors provide services entirely outside the UK, the off-payroll working rules will generally not apply. However, once contractors begin undertaking substantive duties in the UK, the position can change significantly.

Whilst occasional UK visits for induction or training may be regarded as incidental, regular attendance at project meetings, client visits or other business activities can bring the engagement within scope of the UK off-payroll working rules. Separate PAYE and NIC anti-avoidance provisions may also apply where overseas agencies are involved.

Businesses engaging international contractors should therefore carefully monitor the location of work being performed and the associated UK tax implications.

Over-Reliance on HMRC's CEST Tool

HMRC's CEST tool can be a useful starting point for employment status assessments. HMRC states that it will stand by the outcome provided the information entered is accurate and aligns with its guidance.

However, businesses should be cautious about relying solely on the tool.

Common issues we encounter include:

• Responses that do not fully reflect HMRC guidance
• Employment status assessments that have not been revisited for several years
• Blanket determinations applied across multiple workers with differing responsibilities
• "Unable to determine" outcomes that leave significant uncertainty

Working practices and contractual arrangements often evolve over time, meaning a determination reached several years ago may no longer reflect reality. Regular reviews are therefore essential, particularly for long-term engagements.

Directors Providing Consultancy Services

An increasingly scrutinised area involves directors providing consultancy services to their own companies.
As office holders, directors are generally treated as employees for tax purposes. Payments made for undertaking director duties are therefore normally subject to employment taxes.

While it is possible for a director, particularly a non-executive director, to provide separate consultancy services, there must be a clear distinction between the director role and the additional services provided. Robust documentation and careful consideration of employment status principles are critical.

HMRC is unlikely to accept arrangements where director duties are said to be performed without remuneration while consultancy work is charged separately at commercial rates.

Given the complexity of this area, specialist advice should be sought before implementing such arrangements.

How OSCO Can Help

IR35 compliance requires more than simply completing a status assessment. Businesses need robust processes to identify risks, assess employment status correctly and maintain compliance as working arrangements evolve.

OSCO's Employment Taxes team can provide practical support with:

• IR35 health checks and risk reviews
• Employment status assessments
• Contractor onboarding processes
• Supply chain reviews
• Overseas contractor engagements
• HMRC enquiries and compliance reviews
• Designing compliant workforce engagement models

By addressing issues proactively, businesses can reduce the risk of unexpected PAYE and NIC liabilities while maintaining a flexible workforce strategy.