Which individuals does an organisation need to assess under the IR35 rules?

The IR35 rules (also known as the off-payroll working rules) apply where an organisation within the scope of the rules engages an individual via an intermediary to provide services.

There are various terms that could be used to describe such an individual, for example, they could be referred to as a freelancer, contractor, consultant, or self-employed person. However they are referred to, the relevant factor is whether or not there is an intermediary involved. For this reason, the use of sole traders does not fall within IR35 (although the engager remains responsible for assessing if such individuals are genuinely self-employed, or if they should be on PAYE as an employee or worker).

An intermediary is usually a personal service company (PSC), but it could also be a partnership, a managed service company or, very unusually, an individual. A PSC is usually a limited company with a single director, and it is the director's services that are being engaged. In all cases, for the off-payroll rules to be relevant, the individual being engaged must have a material interest in the intermediary of at least 5%.

There could be one or more agencies involved in sourcing, and ultimately paying, the individual. For example, the organisation engaging the individual could contract with an agency, which has a contract with the personal service company.

A client organisation does not have to operate the IR35 rules if, for example:

  • an agency already operates PAYE in relation to the individual;
  • there is an "umbrella" arrangement in place (under which the individual is already on PAYE);
  • the client fully contracts out a service (ie where the service is outsourced); or
  • the individual is engaged as a sole trader.