What is IR35? – IR35 Explained

What is IR35?

IR35 — officially the intermediaries legislation, and in its modern form the ‘off-payroll working rules’ — exists to answer one question: if your limited company disappeared tomorrow, would you just be an employee of your client?

If the answer is yes, HMRC calls that disguised employment. The work is taxed like employment (PAYE and National Insurance) rather than through the company as salary and dividends — and the tax difference is substantial, which is why IR35 status matters so much to contractors.

Crucially, IR35 is decided engagement by engagement. It’s not a label on you or your company: you can have an outside-IR35 contract and an inside-IR35 contract running in the same month.

Who decides your IR35 status?

This is where the rules changed most — and where older articles will mislead you.

• Public sector (since April 2017) — the public body you work for determines your status, not you.
• Medium and large private-sector clients (since April 2021) — the client determines your status and must give you a Status Determination Statement (SDS) setting out the decision and the reasons. Whoever pays your company (the ‘fee-payer’ — often an agency) then deducts tax and National Insurance before paying you if you’re inside.
• Small private-sector clients — the old rules still apply: your own company assesses each engagement, and responsibility sits with you. ‘Small’ here means small under the Companies Act tests; your client or agency should be able to confirm whether the exemption applies.

If you disagree with an SDS you can challenge it — the client must consider your representations and respond within 45 days. A well-evidenced challenge does sometimes change a determination, which is one reason the status tests below still matter even when the decision isn’t yours.

The tests that decide status

Status comes from case law, and three factors carry most of the weight:

1. Control. Who decides what you do, and how, when and where you do it? Taking reasonable direction on what outcome is needed is normal for a contractor; being managed step-by-step like a staff member points inside.

2. Personal service and substitution. An employee must turn up personally. A genuine business can, at least in principle, send a suitably qualified substitute at its own cost. An unfettered right of substitution — and better still, one that’s actually been exercised — is one of the strongest outside indicators there is.

3. Mutuality of obligation. Is the client obliged to keep offering you work, and are you obliged to accept it? Employment has that ongoing obligation; a contract for a defined piece of work doesn’t. Finishing the project and leaving — without an expectation of being found more work — points outside.

Supporting factors then round out the picture: whether you use your own equipment where the site allows, whether you carry real financial risk (fixing defective work at your own cost, for example), how embedded you are in the client’s organisation (staff perks, line management, internal directories point inside), and whether you look like a business in your own right — multiple clients, insurance, your own branding.

What about HMRC’s CEST tool?

CEST (Check Employment Status for Tax) is HMRC’s online status tool, and it’s what many clients use to produce determinations. HMRC says it will stand by a CEST result if the answers given were accurate — which is exactly where it goes wrong in practice: rushed or cautious answers by a client can produce an inside result the working reality doesn’t support. If a CEST-based determination looks wrong, that’s what the challenge process is for, and good evidence of your actual working practices is what wins it.

What inside and outside actually mean for your money

Outside IR35: your company invoices gross, you pay yourself tax-efficiently through salary and dividends, and normal business expenses apply. Our take-home pay calculator shows the difference in real numbers.

Inside IR35 (client-determined): the fee-payer deducts income tax and employee National Insurance before your company is paid. Many contractors use an umbrella for inside contracts instead — see limited company vs umbrella for how to choose. An inside contract doesn’t make your company pointless: plenty of contractors run a mix, keeping the company for outside work.

How to protect an outside-IR35 position

• Get every contract reviewed before you sign — the paperwork needs to reflect an outside relationship, not an employment one dressed up.
• Make sure your working practices match the contract. HMRC looks at reality, not just the document. A perfect contract with employee-like working habits fails.
• Keep an evidence file — substitution clauses (and any actual substitution), correspondence showing you control how you work, records of fixing work at your own cost, multiple concurrent clients.
• Look like a business — insurance, your own kit where practical, your own email and branding rather than a client identity.
• Challenge bad determinations — politely, promptly, with evidence.

Our complimentary IR35 service is built for exactly this: unlimited contract reviews and a yearly assessment of your working practices, included in your monthly fee. For a quick self-check, start with our 5 IR35 questions to ask yourself.