A contractor’s IR35 status effectively determines their tax position with HMRC. It is assessed by the hirer completing an SDS on the contractor’s behalf.
IR35 is legislation used by HMRC to work out whether a contractor should be taxed as an employee according to PAYE rules, or on a limited company basis, withdrawing funds primarily as dividends. A contractor’s IR35 status therefore determines which one applies to them.
The system used to establish a contractor’s status is called an SDS. This assessment uses three key factors in working a status out: supervision, direction and control, right of substitution and mutuality of obligation.
As a general rule, the greater the supervision, direction and control imposed by an end hirer, the more likely it is that the contractor’s status will fall inside IR35 and they will be taxed under PAYE.
It is the end hirers responsibility to assess IR35 status, irrespective of whether it’s a public or private sector contract. They need to complete an employment assessment checklist which takes into consideration the key IR35 indicators.