Fair and compliant offshoring: What is IR35 and who does it apply to?
IR35, sometimes known as ‘off-payroll working rules’, is a UK tax rule intended to ensure that contractors pay around the same income tax and national insurance as employees. Essentially, IR35 rules are in place to prevent tax avoidance.
IR35 rules apply in circumstances where:
- A worker provides services to a business via an intermediary – examples: their own limited company, a partnership, via another individual.
- A worker would be an employee IF they provide these services directly to their client.
IR35 rules may apply if you are:
- A worker who provides services through your own intermediary to a client.
- A client who receives services from a worker through their intermediary.
- An agency or other supplier providing workers’ services through their intermediary.
Who is responsible for determining if IR35 rules apply?
Responsibility for determining if a worker is employed for tax purposes or is outside of IR35 rules changed in 2021 and usually sits with the client business. To help with this HMRC provides an online tool:
https://www.gov.uk/guidance/check-employment-status-for-tax
This tool asks a series of questions that aim to establish if arrangements normally associated with employee status rather than contractor status are in place. For example:
- Provision of necessary IT by the client rather than the worker, and
- The contractor being unable to work for other businesses.
- The contractor being unable to provide a substitute.
- The contractor not being able to decide where and when they work.
There are exceptions. These include:
Umbrella companies
Where someone is employed by an umbrella company – typically an employment agency that pays their salary, plus takes care of tax and national insurance – these arrangements usually sit outside of IR35. Even so, HMRC strongly advises both clients and workers to validate that these arrangements are not tax avoidance schemes. As HMRC themselves say ‘if it seems too good to be true, it probably is.’
Small businesses
Where a worker provides services to a small business this arrangement can sometimes sit outside of IR35 (we’ll cover this later).
Overseas clients
Where a worker provides services to a wholly overseas registered client then the responsibility for determining IR35 status falls on the worker, not the client.
A turnover threshold increase of almost 50% means around 14,000 UK companies will become classified as ‘small’ and exempt from IR35 off-payroll rules. What this means is that responsibility to determining if IR35 rules apply is the responsibility of the worker (via their intermediary), not the small business.
However, the rules aren’t so simple. The new thresholds must be applied to two consecutive financial years ending before the tax year being tested:
- The latest financial year where the filing date for the accounts ends before the beginning of the tax year.
- The financial year before that one.
Determining your company’s status is a challenge for your tax accountant, not us. Our blog’s intended to provide a general overview, not provide definitive guidance that you subsequently rely upon to determine IR35 status.
Things to consider:
1. Businesses/end-users engaging workers should review if the small business exemption applies to them, under the new 2026 IR35 rules.
2. Is your business part of a group? If so, your overall group may fall above the small company exemption.
3. Make affected workers and their intermediaries aware that as a small business, responsibility for checking IR35 status transfers to them.
4. Keep an eye on the thresholds. If you’re having a great year then IR35 responsibility may shift back onto your business.
How big are IR35 fines?
If HMRC opens a review into your business IR35 compliance that subsequently determines that what you deemed to be outside of IR35 is actually within IR35:
- HMRC will make you pay the tax and National Insurance contributions due, as well as any interest due on these amounts.
- A penalty may apply if you can’t prove you exercised reasonable care completing your tax and national insurance contributions.
Brookson Legal, a legal specialist in this space say:
The level of the financial penalty is based on the reason for the inaccurate determination as follows:
- A further penalty of 30% of the unpaid tax if HMRC deems that the End-Hirer was careless about the employment status of its off-payroll workforce but did not know it was inaccurate.
- A further penalty of 70% of unpaid tax if HMRC finds that the End-Hirer knew that the employment status of its off-payroll workforce fell Inside IR35 and yet chose not to act.
- A further penalty of 100% of unpaid tax if HMRC finds that the End-Hirer has actively tried to conceal the employment status and underpayment of tax to its off-payroll workforce.
The IR35 status checker for offshore teams.
You’re probably wondering how the rules apply to:
- Hiring offshore accountants under new UK IR35 thresholds.
- Hiring offshore IT employees under new UK IR35 thresholds.
You may also wish to prove a Filipino contractor is outside IR35.
Broadly speaking, IR35 does not apply if a UK company uses Philippines talent that’s employed by a Philippines entity through a genuine Business Process Outsourcing relationship.
A basic check list is:
1. The Philippine outsourcing entity must have no permanent UK connection (a branch or office). In this case, it’s considered to be wholly overseas. Y/N?
2. The outsourcing company in the Philippines must not be a subsidiary of a UK company. If it is, HMRC may take an interest. Y/N?
3. Your contract must be with a Philippine outsourcer and define the service, not the person delivering it. Y/N?
4. The Philippine outsourcer retains the right to swap the person delivering the service. Y/N?
5. The Philippine company, not the UK company, manages, pays, and handles employment rights for the worker. Y/N?
If you have any doubts, then contact an IR35 specialist to validate that any relationship you’re considering is compliant with IR35.
How to find the right IR35 compliant Philippines outsourcing provider.
We can provide you with IR35 compliant offshore talent. We’ve been supplying lower cost yet quality talent to UK firms for over a decade. We’re well-placed to fill your hard-to-recruit roles.
‘Yempo Solutions reduces our costs. Their complete recruitment, HR and regulation service protects our business from risk.’ – Lizzie R., UK client.
Book a quick chat with Michelle today, to know more about our best practices in providing offshore accounting and IT staff from the Philippines – or shoot us an email at [email protected]. We are happy to answer your questions!
Learn more:
Read more helpful information about outsourcing from Australia or the UK to the Philippines:
5 Huge Financial Advantages of Outsourcing Australian Accountancy Functions
5 Huge Financial Advantages of Outsourcing Australian IT Development Functions
Top 8 industry sectors that most frequently outsource to the Philippines
Outsourcing to the Philippines: Ensuring Fair Pay, Benefits, and Conditions
