Navigating IR35 in the IT sector: A Guide for Employers

If you’re an employer looking to hire IT contractors for your software development projects, you need to be aware of IR35 and its impact on your business. IR35 is a piece of UK tax legislation designed to prevent tax avoidance by those who provide their services through intermediaries, such as personal service companies (PSCs). This legislation has far-reaching consequences for contractors and can affect their financial stability, reputation, and future career prospects.

For employers, the impact of IR35 can be significant, as it requires them to assess the employment status of their contractors and determine if they fall within the scope of the legislation. If a contractor is found to be inside IR35, the employer is responsible for deducting and paying the necessary taxes and National Insurance contributions to HMRC.

This means that employers may need to budget for higher costs when hiring IT contractors and could face penalties for non-compliance. Additionally, the increased administrative burden of complying with IR35 could result in delays in project delivery and reduced flexibility in hiring decisions.

What is IR35 and what is its impact on contractors?

IR35, also known as the Intermediaries Legislation, was introduced in 2000 to ensure that individuals who provide their services to clients in a manner that would be considered as employment if it were not for the intermediary, pay broadly the same tax as if they were employees.

The reforms to IR35, which came into effect in April 2017, significantly changed the landscape for contractors working in the private sector. Under the reforms, medium and large-sized organisations are now responsible for determining the IR35 status of contracts with contractors. This means that contractors can no longer self-declare their IR35 status and must rely on their clients to make the determination. If a contract is deemed to fall inside IR35, the contractor must pay both employee and employer national insurance contributions, as well as income tax, as if they were a regular employee.

Navigating IR35

Navigating IR35 can be a complex process, but there are steps that employers can take to ensure compliance:

  • Understanding the rules: Employers must have a good understanding of the IR35 rules and regulations. This includes the factors that HM Revenue and Customs (HMRC) will consider when determining whether a contract falls inside or outside of IR35.
  • Seeking professional advice: Employers are encouraged to seek professional advice from IR35 specialists to ensure that they are fully compliant with the legislation.
  • Using tools: that allow employers and contractors to check whether a contract will fall inside or outside of IR35. This tool can provide a quick and straightforward way to assess your contracts and ensure compliance.

Penalties for businesses and contractors for IR35 non-compliance

There have been some confusing messages from the government with regard to penalties issued to businesses for IR35 non-compliance. After a honeymoon period declared in 2021 when businesses were given the opportunity to get their paperwork in order, the Chancellor made a U-turn and stated that the upcoming penalty scheme would be scrapped. In October 2022 the new Chancellor then made another government U-turn and stated that the penalties against businesses would not be scrapped after all.

The size of the IR35 penalty for businesses varies. It is based on the value of unpaid tax liability, how thoroughly the business researches a contractor’s IR35 status, and how well the business co-operates with the HMRC investigation. It can range from zero to 100% of what is owed per contractor.

For contractors, non-compliance with IR35 can lead to a penalty of between 30% and 100% of the tax liability owed, depending on whether they were simply careless about their IR35 status, or they deliberately concealed their IR35 status.

How does IR35 impact tech projects?

There continues to be an IT skills shortage. The demand for contractors to complete tech projects therefore shows no signs of slowing down. According to ContractorUK, the speed to hire good contractors will be essential for the smooth running of projects, keeping contractors very much in the driving seat.

In 2023, a work-life balance is becoming more of a priority for tech contractors, with almost half preferring to work entirely remotely, although this option is only offered by around 25% of organisations. With contractors driving change, it is likely that more organisations will compromise on this and adapt accordingly.

It is anticipated that in 2023 IT contractor day rates will rise due to the increase in demand for contractors’ skills and the rising cost of living. Around 59% of organisations are prepared to raise contractor rates in the next 12 months.

When choosing projects, IR35 will continue to be as important as the rate for contractors. Working with organisations that have their IR35 act together will be a big draw.

How can RFS provide reassurance to employers in navigating IR35?

Navigating IR35 can be a daunting task for employers, especially with the recent updates and changes to the legislation. Recruitment Funding Solutions recognises the challenges employers face in ensuring compliance and offers a range of services to support them in navigating IR35. One of the key tools available is the IR35 assessment tool, which helps employers determine the IR35 status of their contractors. By utilising this tool and seeking expert advice, employers can navigate IR35 with confidence and avoid the risk of non-compliance.

Recruitment Funding Solutions is committed to providing comprehensive support to employers and their contractors, ensuring they are equipped to make informed decisions and protect their businesses from potential risks associated with IR35.

Need help with IR35?

For more information and support on IR35, visit Recruitment Funding Solutions’ website at

Resources & Links to further reading on IR35

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