IR35 is the set of rules HMRC uses to decide whether a contractor is genuinely self-employed or effectively an employee. If HMRC decides you fall inside IR35, you pay Income Tax and National Insurance at employee rates, but you do not get employee rights.
Getting your IR35 status wrong is expensive. It’s worth understanding the rules before you start a new contract.
Disclaimer: This article is for general information only. It doesn’t constitute tax or legal advice. Your IR35 status depends on the specific terms of your contract and working arrangements. Speak to a qualified accountant before making decisions.
What is IR35 and who does it affect?
IR35 applies to contractors who work through an intermediary, usually a limited company or personal service company (PSC) and whose working relationship with their client resembles employment. It primarily affects IT, engineering, finance, and consulting contractors working in the private and public sectors.
The legislation was introduced in 2000. Its name comes from the Inland Revenue Press Release 35 that announced it. The underlying principle hasn’t changed: HMRC wants contractors who work like employees to pay tax like employees, even if they bill through a company. HMRC’s off-payroll working guidance covers the current rules in full.
IR35 doesn’t affect sole traders billing directly. It applies specifically to contractors who operate through a limited company or other intermediary. Not sure whether to set up as a sole trader or limited company? Read our guide on limited company vs sole trader in the UK.
How do you know if you’re inside or outside IR35?
Three factors carry the most weight: substitution (can you send someone else to do your work?), control (does the client control how and when you work?), and mutuality of obligation (is the client obliged to offer work and are you obliged to accept it?). Outside IR35 means genuine self-employment. Inside IR35 means HMRC treats you as an employee.
These are not the only factors. Courts and HMRC also look at:
Substitution. Can you send a qualified substitute if you can’t work? If yes, and the client accepts this in practice, this is a strong indicator of self-employment. If the client insists on you personally, that points toward employment.
Control. Does the client dictate your hours, location, and method? Genuine contractors decide how they deliver the work. The client specifies the outcome, not the process.
Mutuality of obligation. Is there an expectation that work will continue to flow? A series of rolling contracts with no breaks looks more like employment than a series of genuinely discrete projects.
Financial risk. Do you bear real financial risk? Fixing prices, covering your own expenses, and bidding for individual projects are signs of self-employment.
What is a Status Determination Statement (SDS)?
From April 2021, medium and large private sector clients became responsible for deciding a contractor’s IR35 status and providing a written Status Determination Statement. If you work for a small client (defined under the Companies Act 2006, HMRC’s guidance has the exact criteria), you still determine your own status.
Before April 2021, contractors in the private sector determined their own IR35 status. That changed with the Off-Payroll Working Rules reform. HMRC’s intermediaries guidance explains what the reform means for contractors and their PSCs.
Now the process works like this:
- The client assesses the engagement against the IR35 tests
- The client issues an SDS, a written statement of its decision
- If the contractor disagrees, they can formally challenge it
- The client must respond within 45 days
An SDS that says “inside IR35” means the fee payer (usually the agency or client) must deduct PAYE tax and National Insurance before paying you.
HMRC provides a free tool called Check Employment Status for Tax (CEST) to help determine status. It’s not perfect, it doesn’t cover every scenario, but clients commonly use it. You can also use it to check your own position.
What changed with the IR35 off-payroll rules?
The key change was liability shifting from the contractor to the client. Before April 2017 in the public sector and April 2021 in the private sector, the contractor was responsible for determining and paying any IR35 tax. After the reform, medium and large businesses that hire contractors are responsible for both the determination and ensuring the correct tax is paid.
This matters for two reasons.
First, if a client gets the SDS wrong and places you inside IR35 when you’re genuinely outside it, it’s now the client’s liability, not yours. You have a formal right to challenge an incorrect determination.
Second, many clients now default to “inside IR35” to avoid risk. This has pushed some contractors toward umbrella companies, where employment taxes are handled automatically. If you’re comparing your options, specialist accountants for contractors in the UK can review your specific situation and tell you which structure works out better.
What happens if you’re deemed inside IR35?
If a client places you inside IR35, the fee payer deducts income tax and National Insurance from your gross contract rate before paying you. You lose the flexibility of paying yourself a salary plus dividends.
You won’t get employee rights, no sick pay, no annual leave entitlement, no pension contributions from the client. You pay employee tax rates without employee benefits.
Your limited company receives the net pay after tax. The company can still cover its running costs, but you can’t extract income as dividends in the normal tax-efficient way.
Can you challenge an IR35 determination?
Yes. If your client issues an SDS placing you inside IR35 and you believe the determination is wrong, you can submit a formal disagreement. The client must respond within 45 days with either a revised determination or reasons why they’re maintaining the original one.
If you believe a determination is persistently incorrect across multiple engagements, a specialist contractor accountant can help you build the case. Good contracts, accurate working practices, and documented evidence of substitution and control all support a challenge.
What should contractors do to protect their IR35 position?
Keep your contract and working practices aligned. An outside IR35 contract that doesn’t reflect reality carries risk. If you bill for outputs, work from your own premises where possible, use your own equipment, and never work exclusively for one client for years on end, your position is stronger.
Have your contracts reviewed by a specialist. Poorly drafted contracts often include clauses that inadvertently suggest employment.
Maintain genuine business costs and operations. A limited company that exists purely as a vehicle for one contractor at one client looks different from a business with multiple clients, its own insurance, and genuine commercial operations.
Get proper accounting support. If you work through a limited company, your accounting needs are different from a sole trader’s. Get a quote and we’ll send you our current pricing, DASA’s contractor accountancy service.