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What is IR35, also known as the "Off-Payroll Working Rules" and has anyone ever been sanctioned in t

July 29, 2025 posted by Steve Brownstein

IR35, also known as the "Off-Payroll Working Rules" or "Intermediaries Legislation" (Chapter 8 Part 2 of the Income Tax (Earnings and Pensions) Act 2003 - ITEPA), is UK tax legislation designed to prevent "disguised employment."

In essence, it aims to ensure that individuals who provide their services through an intermediary (most commonly their own limited company, often called a Personal Service Company or PSC) but whose working relationship with the client is, in reality, akin to that of an employee, pay broadly the same Income Tax and National Insurance Contributions (NICs) as a regular employee.

The purpose is to crack down on tax avoidance where workers might otherwise gain tax advantages (like paying less NICs or taking dividends instead of a salary) by being "self-employed" through a limited company, when in substance, they are working as an employee.

Key aspects of IR35:

• Disguised Employment: The core concept is identifying if a contractor is a "disguised employee."

• Status Determination: The legislation sets out criteria (e.g., control over the work, right of substitution, mutuality of obligation, integration into the client's business) to determine if a contract falls "inside IR35" (meaning the worker is deemed an employee for tax purposes) or "outside IR35" (meaning they are genuinely self-employed).

• Shifted Responsibility:

  • Since April 2017 (Public Sector): The responsibility for determining IR35 status shifted from the contractor's limited company to the public sector client.

  • Since April 2021 (Medium/Large Private Sector): This responsibility extended to medium and large private sector organizations.

  • Small Private Sector Businesses: If the client is a "small" private sector business, the responsibility for determining IR35 status and accounting for taxes generally remains with the contractor's limited company.

• Tax Implications: If a contract falls "inside IR35," the "fee-payer" (often the client or an agency in the chain) is responsible for deducting Income Tax and National Insurance Contributions (both employee and employer NICs) at source, similar to a regular employee's PAYE (Pay As You Earn) deductions.

Has anyone ever been sanctioned/penalized under IR35?

Yes, absolutely. HMRC (Her Majesty's Revenue and Customs), the UK's tax authority, actively enforces IR35, and there have been numerous cases where individuals and, more recently, public and private sector organizations have faced significant penalties for non-compliance.

Types of Sanctions/Penalties:

1. Backdated Taxes and National Insurance Contributions: This is the primary financial consequence. If HMRC determines that a contract was incorrectly assessed as "outside IR35" when it should have been "inside," the responsible party (the fee-payer in most cases under the reforms, or the contractor's PSC if they are working for a small client) will be liable for all the unpaid Income Tax and NICs that should have been deducted, going back several years (typically 4-6 years, or even more in cases of carelessness or deliberate concealment).

2. Interest: Interest is charged on the underpaid tax from the date it was originally due. This can accumulate to a substantial amount given how long HMRC investigations can take.

3. Financial Penalties: On top of the backdated tax and interest, HMRC can impose further penalties. The severity of these penalties depends on the behavior of the non-compliant party:

   • Careless: Penalties can be around 30% of the unpaid tax if the mistake was due to carelessness (e.g., not taking "reasonable care" in their IR35 status determination).

   • Deliberate but not concealed: Penalties can be higher, around 70%.

   • Deliberate and concealed: Penalties can reach 100% of the unpaid tax, effectively doubling the amount owed.

4. Reputational Damage: For organizations, being found non-compliant can lead to significant reputational damage, public scrutiny, and potential exclusion from future government contracts or preferred supplier lists.

5. Legal Costs: Investigations can be lengthy and complex, leading to substantial legal and professional fees to defend the position or resolve the issue with HMRC.

Notable Cases/Examples:

Several high-profile organizations in the UK, particularly in the public sector since the 2017 reforms, have faced multi-million-pound fines for IR35 non-compliance. Some widely reported examples include:

• Department for Environment, Food and Rural Affairs (DEFRA): Fined tens of millions for incorrectly applying IR35.

• NHS Digital: Faced significant fines for misclassifying contractors.

• Ministry of Justice: Also incurred large penalties.

• Innovate UK: Penalized for incorrect determinations.

These cases highlight that HMRC is serious about enforcing IR35 and that organizations (and individuals where applicable) must take their status determinations and compliance seriously. Many organizations now invest heavily in robust IR35 assessment processes, often seeking professional advice to mitigate their risks.