Summary
IR35 (the off-payroll working rules) determines whether a contractor working through a limited company should be taxed as an employee. If you are inside IR35, income tax and NICs are deducted at source. If you are outside IR35, you retain the tax efficiency of operating through your own limited company.
What Is IR35?
IR35 — formally known as the off-payroll working rules — is HMRC legislation designed to prevent "disguised employment". The rules apply when a contractor works through a personal service company (PSC) or other intermediary, but the nature of the engagement resembles employment rather than genuine self-employment.
The rules were first introduced in 2000, but the most significant change came with reforms to Chapter 10 of ITEPA 2003. The public sector reform (April 2017) and the private sector extension (April 2021) shifted the responsibility for determining IR35 status from contractors themselves to the end-client — for medium and large businesses.
The consequence of a determination that you are inside IR35 is substantial: your entire contract income is treated as employment income, with PAYE income tax and employee plus employer National Insurance Contributions deducted at source — typically by the fee-payer (often a recruitment agency) before you receive payment.
Who Decides Your IR35 Status?
Since the April 2021 private sector reform, the responsibility for determining IR35 status depends on the size of the end-client:
| Client Size | Who determines status? |
|---|---|
| Small company (2 of 3: turnover <£10.2m, <50 employees, balance sheet <£5.1m) | Contractor (self-determines) |
| Medium or large company (private sector) | End-client issues a Status Determination Statement (SDS) |
| Public sector bodies | End-client (has been so since April 2017) |
Where the end-client determines status, they must issue a Status Determination Statement (SDS) and take "reasonable care" in making that determination. An SDS issued without reasonable care can shift the liability back to the client.
The Three Key IR35 Status Tests
HMRC uses three primary factors — derived from case law — to determine whether an engagement is employment or self-employment in substance:
Control
Does the client control how, when, and where the work is carried out? A genuine contractor sets their own hours, chooses their methodology, and is not subject to day-to-day supervision beyond the output required. A contractor directed like an employee is likely inside IR35.
Substitution
Can the contractor send a suitably qualified substitute to carry out the work — without the client's veto? A genuine right of substitution points strongly to outside IR35. The right must be real (not just a contractual clause) and unchallenged in practice.
Mutuality of Obligation (MOO)
Is there an obligation on the client to offer further work and on the contractor to accept it? Where a client can simply stop offering work and the contractor can walk away with no further obligation, MOO is absent — pointing to outside IR35. Ongoing "rolling" engagements often attract HMRC scrutiny on this test.
Other factors also carry weight: financial risk (do you bear the cost of correcting your own mistakes?), provision of equipment, and whether you work for multiple clients simultaneously. No single factor is determinative — HMRC looks at the overall picture.
Inside vs Outside IR35: The Financial Difference
The tax outcome of inside versus outside IR35 is significant. For a contractor billing £100,000 per year:
| Status | Approx. tax & NI take-home | Key difference |
|---|---|---|
| Inside IR35 | ~£63,000 | Income tax + employee & employer NICs deducted at source |
| Outside IR35 | ~£76,000 | Salary + dividends structure; corporation tax and dividend tax at lower rates |
Figures are approximate and depend on salary level, dividend amounts, corporation tax rate, and personal circumstances. Based on 2025/26 tax year rates.
How to Protect Your Outside IR35 Position
A determination that you are outside IR35 is only as strong as the evidence supporting it. Contractors should:
- →Ensure your contract reflects the working reality — vague or template contracts that do not match your actual engagement are a red flag
- →Exercise your right of substitution at least once, or document the clause in practice (even if never invoked)
- →Maintain a record of working from your own equipment, your own premises, and your own chosen hours
- →Avoid taking on the trappings of employment: company email addresses, staff lanyards, being managed in the same performance review cycle as employees
- →Have your contract reviewed by a qualified IR35 specialist before each engagement — not just once
- →Take out Professional Indemnity insurance and show you bear genuine financial risk
- →Work for multiple clients where possible — exclusivity signals employment
IR35 Penalties and HMRC Investigations
HMRC's IR35 investigations have intensified since 2021. Where HMRC determines that IR35 applied and was not complied with, the consequences for the fee-payer (typically the agency) include:
How We Help Contractors With IR35
We carry out contract and working-practice reviews for contractors across East London and throughout the UK — assessing your position against the HMRC tests and providing a written opinion to support your determination.
- →Contract review against the three key IR35 tests — control, substitution, and mutuality of obligation
- →Written status opinion letter (suitable for use with clients and HMRC if challenged)
- →Advice on restructuring your engagement to strengthen an outside-IR35 position
- →Ongoing monitoring as HMRC guidance and case law evolves
- →Director self-assessment and company accounts for your personal service company
If you have received an inside-IR35 determination you wish to challenge, or if you are uncertain about your status, get in touch — we can review your position and advise on the strongest lawful approach.