IR35 and Contractor Payroll: UK Employer Guide

IR35 — formally known as the off-payroll working rules — determines whether a contractor working through their own limited company should be treated as an employee for tax purposes. Since 2021, medium and large private sector businesses have been responsible for making the IR35 determination — not the contractor. If you determine that a contractor is inside IR35, you must deduct PAYE and NI from the payments you make to them.

The determination is made using HMRC's Check Employment Status for Tax (CEST) tool or a considered review of the actual working arrangements. Key factors include: whether the contractor has substitution rights, how integrated they are with your team, and whether there is mutuality of obligation between you. A Status Determination Statement (SDS) must be provided to the contractor in writing.

Mellow's IR35 module — available from the Enterprise tier — manages the determination process. You record the assessment criteria, the outcome, and the SDS. If a contractor is determined to be inside IR35, Mellow flags the payroll change and updates the payment processing accordingly. The module keeps an audit trail of all determinations — important because HMRC can investigate IR35 compliance up to six years after the fact.