IR35 is one of the most complex and contentious areas of UK tax law for contractors. Whether you operate through a limited company or are considering doing so, understanding the off-payroll working rules is essential. Here's what you need to know.
What Is IR35?
IR35 is legislation designed to tackle "disguised employment"—situations where an individual works like an employee but operates through an intermediary (usually a limited company) to gain tax advantages. If IR35 applies to a contract, the contractor pays broadly the same income tax and National Insurance as an employee.
Key Point: Inside vs Outside IR35
- Inside IR35: The engagement resembles employment → higher tax liability
- Outside IR35: Genuine self-employment → tax-efficient contractor arrangements
The Off-Payroll Working Rules (April 2021)
Since April 2021, medium and large private sector businesses are responsible for determining the IR35 status of contractors they engage. This shifted the liability from the contractor's personal service company (PSC) to the end client or agency.
Small companies are exempt. A company is "small" if it meets two of these criteria:
- Annual turnover of no more than £10.2 million
- Balance sheet total of no more than £5.1 million
- No more than 50 employees
How Is Employment Status Determined?
HMRC looks at the reality of the working arrangement, not just the contract wording. Three key factors are considered:
1. Control
Does the client control what work is done, how it's done, when it's done, and where it's done? The more control the client has, the more it looks like employment.
2. Substitution
Can the contractor send a substitute to do the work without the client's approval? A genuine right of substitution is a strong indicator of self-employment.
3. Mutuality of Obligation (MOO)
Is the client obliged to offer work, and is the contractor obliged to accept it? If there's no ongoing obligation between contracts, it suggests self-employment.
💡 HMRC's CEST Tool
HMRC provides the Check Employment Status for Tax (CEST) tool to help determine IR35 status. However, it has limitations and doesn't always give definitive answers. We recommend using it alongside professional advice.
What Happens If You're Inside IR35?
If a contract is determined to be inside IR35:
- Income tax and employee NICs are deducted at source by the fee-payer
- Employer NICs are paid by the fee-payer (usually the agency or client)
- You lose the tax efficiencies of taking dividends from your limited company
- A 5% allowance can be deducted for running your PSC
How to Protect Yourself
- Get contracts reviewed: Ensure your contract reflects the genuine working relationship
- Document working practices: Keep evidence of how you actually work (flexible hours, own equipment, etc.)
- Challenge incorrect determinations: You can dispute a Status Determination Statement (SDS) you disagree with
- Consider IR35 insurance: Tax investigation insurance can cover legal costs if HMRC investigates
- Seek professional advice: An IR35 specialist can assess your contracts and working arrangements
Need Help with IR35 Compliance?
IR35 can be complex, and getting it wrong can be costly. At FFC Accountants, we help contractors understand their obligations, review contracts, and structure their arrangements tax-efficiently while remaining compliant.
