Working Through an Intermediary Company

Working Through an Intermediary Company and IR35

1. Use of intermediary

When a worker is engaged to work for another, they may be dealing directly with their client, with no third person or entity in any way also involved with that arrangement. Alternatively in some cases a third party intermediary may be involved as part of the arrangements. Depending on the circumstances, where there is an intermediary, the worker could be treated in law as employed or self-employed or, in the context of IR35 (see below) as if employed by the client. However, in some cases their status may not be clear. (See also under “Employment agency or business” below as to “employment intermediaries”.)

2. Personal Service Company (PSC)

Often the third party used will be the worker’s own personal service company (“PSC”) acting as an intermediary between the worker and their clients. The worker does not contract with any clients - only the PSC does so.

The usual reason for a worker using a PSC is that, as a result, they aim to and often will derive a tax/NIC benefit (see below) compared to working as an employee or self-employed individual.

A PSC will often consist of two Directors, or one Director and the Company Secretary (who are often husband and wife). There are normally no employees other than those two people, and usually only one of them is the only worker providing services to their client. The PSC earns all, or almost all, of its income from supplying the worker’s services to clients. In each case there is a contract between the PSC and the client (either directly or via an agency) under which the PSC is paid to supply the worker’s services. The worker receives (or is entitled to receive) payments or benefits from the PSC, often in the form of share dividends from the PSC rather than any or any substantial salary payment.

The effect of the UK system if a person is self-employed rather than an employee is that they pay a lower level of Income tax and/or NIC (“tax/NIC”); and if they work through an intermediary, they may pay an even lower level of tax/NIC.

Many years ago, to achieve tax and NIC savings it was common practice for individuals to supply their services through a PSC, in particular in the IT and media sectors. Despite the PSC having to pay Corporation Tax, there was usually an overall saving where a worker drew remuneration only or mostly in dividends, since no NICs were payable on dividends, and, often (depending on the amount of the dividends) there might be no tax to pay on dividends.

3. The intermediaries legislation (“IR35”)

Since 2000, when the “IR35” first came into effect, it has acquired the reputation of being notorious and difficult.

Where a worker provides his services to a client via a PSC, the situation is regulated by IR35 rules. As explained below under “Employed/Self-employed”, the key principle applied by IR35 is that where someone works through a PSC, they are treated as employed where, if they had instead worked as an individual (and not through a PSC), they would have been regarded in law as employed, not self-employed.

The aim of IR35 was to prevent avoidance of tax/NIC payable in respect of an employee, and over the years it has been progressively tightened up with the result that, depending on their particular circumstances, workers may now gain little or no advantage from carrying out their work through a PSC.

The tax regime imposes a higher tax bill on dividends paid by PSCs than it did pre-2016, and there is a restriction on tax relief claimable on travel and subsistence expenses incurred by a worker caught by IR35.

Further measures tightening up IR35 might be implemented by HM Government in future, to reduce non-compliance with IR35.  

Future possible changes to tighten up IR35 might include deeming freelance contractors to be employees once they have worked for a client for a month, creating a statutory test for whether or not someone is to be regarded as self-employed, treating workers as if they were employed (see below) where they are subject to supervision, direction or control from their client, and/or aligning income tax and NIC rates, or other changes.

4. “Intermediary” defined

Whilst the IR35 rules relating to tax are separate from those relating to NICs, they are very similar. The following is intended to cover both tax and NICs.

IR35 applies to what it defines as an “intermediary” for its purposes. Although an “intermediary” may be a company, a partnership, an unincorporated association, or another individual, this note deals only with intermediaries which are companies, on the assumption that the client/employer will most often be contracting with a PSC rather than some other non-corporate form of intermediary.

In brief, a company (typically a PSC) is an “intermediary” if, in relation to the worker who supplies the services to the client, the following tests are met:

  • the worker is a member of the PSC (i.e. a shareholder of it); and
  • the worker receives or is entitled to receive from the PSC a payment or benefit that is not chargeable to tax as employment income; and 
  • The PSC is not an “associated” company of the client (within the meaning of associated company under Section 449 of the Corporation Taxes Act 2010; and
  • Either the worker has a “material interest” in the PSC or the payment or benefit can “reasonably be taken to represent” remuneration for the services the worker provided to the client. “Material interest” is defined as ownership or control of more than 5% of the ordinary shares of the PSC by the worker and/or the worker’s “associate(s)”.

5. Employed/self-employed

IR35 requires the underlying nature of a worker’s relationship with a client to be considered. A crucial factor is whether the worker would in law have been an employee of the client if they had not been engaged via the PSC intermediary, that is to say, if the worker would have been an employee if they had contracted directly with the client to carry out the particular work concerned personally. IR35 will not apply unless, firstly, this test is passed, but it is not an easy test to apply. Each case depends on its own particular facts. The other tests (which also then have to be met for IR35 to apply) are in comparison much easier to understand and apply in practice.

There is no current HMRC guidance which can be used to assess whether an intermediary (PSC) is a genuine business entity, i.e. as to whether a worker is either genuinely self-employed, or instead should be regarded as if employed by the client such that (if all other IR35 tests are also passed) IR35 is to be applied.

There is a certain amount of case law bearing on the question of whether IR35 applies to any arrangements between client, worker and PSC, but because the position in each instance depends on its own facts, case law is of limited assistance when considering whether IR35 applies in a particular instance. We have therefore not included in this note any reference to, or discussion of, any case law decisions of relevance to IR35.

In general, if arrangements made between a worker and client allow the worker to substitute someone else to do any of the work, that factor may regarded as one of the indications of possible self-employment – see information pages Indicators of employment and Indicators of self-employment. However, where there is a PSC intermediary, if the worker in fact “personally provides services”, then even if the worker has a right under arrangements between client and PSC to substitute someone else for themselves, that factor cannot be taken into account for IR35 purposes when considering whether they are to be regarded as if employed by the client. The fact that they actually carry out all work personally will therefore tend to indicate deemed employment (rather than self-employment) in the IR35 context.

6. The effect of IR35

When IR35 applies, the income of the PSC from the work carried out for the client is regarded as the worker’s earnings which are chargeable to tax as their employment income and subject to Class 1 NICs, called for this purpose an “employment payment” to them by the PSC. IR35 includes long and detailed formulae to be applied to calculate the amount and time of receipt of this deemed “employment payment” to each person who works for the PSC.

IR35 also impacts other areas of taxation and must be taken into account in various situations, such as when dealing with self-assessment or corporation tax returns.

In order to avoid lengthening this note still further, we have not dealt with IR35 in relation to benefits received by PSCs/workers other than monetary payment, but it is important to bear in mind that IR35 also covers such other benefits with the result that they will also be subject to tax and NIC liability.

7. Managed service companies (MSC)

IR35 does not apply to managed service companies (“MSCs”) and some composite service companies. There is separate tax/NIC anti-avoidance legislation for MSCs. That legislation contains tests specifically applicable to MSCs.

8. Employment agency or business

Employment agencies and businesses are beyond the scope of this note, but for completeness, please be aware of the following points

Where a third party entity is acting as an “employment agency”, the agency is not the employer of the worker - the person/organisation to whom the agency introduces him for that purpose the worker is his employer. That introduction is only to enable the worker to be employed, not to be self-employed. Contrast the position where the third party entity is acting as an “employment business”. In that case, the worker is neither self-employed nor employed by the person/organisation to whom the worker provides services. The worker is employed by the employment business which then supplies their services to its client.

However, there are special “agency rules” which can apply to an employment agency or business. Where those rules apply, such entities are responsible for ensuring that tax and NIC is paid correctly for workers. There is HMRC guidance (23 September 2015) about the “agency rules” at