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What is IR35?

If you currently engage with limited company contractors, you’ve probably heard the term “IR35”, but what does it mean, how does it affect you and how can Bar2's brand new support service help? IR35, also known as Intermediary Legislation or “Off Payroll Tax”, was introduced in April 2000 as part of the Finance Bill, with the goal of tackling the misuse of personal service companies (PSC’s) and combat tax avoidance. The government made IR35 changes to the public sector in 2017 and will further reform the legislation for the private sector in April 2021.

What does IR35 mean?

If an individual, providing their services through an intermediary PSC, would have been an employee of the end hirer had the intermediary in all but name had not existed, this would be classed as “disguised employment”.

The earnings of this PSC could then be considered a salary and income tax and national insurance contributions are payable, like an employee.

In basic terms, if you are engaging with a limited company contractor, working very much like a permanent employee of the end client as opposed to having more of a business-to-business relationship then the HMRC sees it that they should be paying just as many taxes as an employee.

April 2021 will see a change in onus from the contractor making the determination and correct tax deductions over to the end client (determination status) and/or agency (to deduct the correct tax)

HMRC’s Goal?

The IR35 legislation sets out to ensure that contractors operating through limited companies, but working like employees, pay broadly the same amount of tax as they would if they were employed. Working as a contractor is often more tax efficient than working as an employee of a company. The government wants to use IR35 to remove what it deems an unfair advantage, and at the same time increase its overall tax revenue.


The ambiguity of IR35 doesn't help here! But HMRC have developed a ‘Check Employment Status for Tax tool’ (CEST) to help determine whether an employment relationship exists. This test should be used in conjunction with your written contract and day to day working practices with your end client, generating an overall picture of your engagement.

When undertaking an IR35 assessment, there are two classifications; inside of IR35 or outside of IR35.

Inside IR35

To be operating 'inside IR35' means that you must pay the same tax as an employee.

Outside IR35

To be operating as a genuine business, and therefore operating outside of the IR35 rules.

Impact of these changes?  

IR35 will affect you as the end client or agency engaging with contractors via their own limited company. The new April 2021 reform means that the responsibility for determining IR35 will lie with the end client or agency to make this determination. Put simply, every medium and large private sector business in the UK will become responsible for setting the tax status of any contract worker. Contractors will no longer decide the status of your own contract! Failure to comply to the new rules could mean end clients and agencies will incur enormous financial consequences but don’t worry, our experts can help!

How can Bar2 help?

As experts, we know the HMRC CEST tool could take hours to complete for each contractor. Not to mention inaccurate results, undetermined results and not exactly trusted within the industry! So Bar2 have teamed up with a fantastic, reliable IR35 product that provides an accurate assessment of your contractors IR35 status! We can significantly reduce your IR35 workload, reduce your liability risks whilst ensuring your supply chain is compliant.

If your contractor is deemed ‘outside IR35’ you can confidently continue engagement with the contractors PSC as our ‘status determination’ offers proof that due diligence has been conducted. Conversely, if deemed ‘inside IR35’, it is likely that end users will refrain from engaging with PSC’s and instead, will request either an employment relationship or that contractors are engaged via another type of intermediary, such as an Umbrella Company.

If your contractors are assessed as being ‘inside IR35’ they will be taxed in the same way as an employee, however they may not receive the statutory benefits that are associated with employment e.g holiday, sick pay, maternity and paternity. Bar2 have the option of continuing to engage via the ‘inside IR35’ PSC however applying ‘deemed employment’ to the assignment, so the correct tax is applied, deducted and paid across to HMRC.  

However, end clients or agencies and your ‘inside IR35’ contractor could choose to engage via an umbrella company such as Bar2 (a limited company that employs contractors and acts as a third party supplier acting between the contractor and the client) you don’t need to worry about IR35 as they’re already paid through the PAYE system and work under a contract of employment with the umbrella company!

Find out more about our IR35 support service

Umbrella benefits for your contractors

  • Holiday pay, statutory sick pay and Paternity/Maternity pay
  • Pension contributions (employer and employee)
  • One employer for all their contracts
  • Payslips for proof of income such as credit or rent/mortgage applications.
  • Financial peace of mind– Tax and NI will be automatically deducted every payroll so there will no nasty surprises
  • Flexibility – No fee’s when they’re not working
  • Simplicity - No Limited Company admin like tax returns, VAT, book keeping, HMRC or Companies House submissions
  • Friday payments
  • No IR35 implications