IR35 explained: how to know if it applies to you

IR35 is one of those rules that every UK contractor has heard of but few fully understand. The confusion is understandable — HMRC’s off-payroll working rules are genuinely complex, and the consequences of getting your status wrong are significant. This guide explains what IR35 is, how status is determined, and what to do if you find yourself inside it.

What IR35 is and why HMRC introduced it

IR35 — formally the off-payroll working rules — was introduced in 2000 to address a specific arrangement. Workers would leave a permanent job, set up a personal service company (PSC), and return to do essentially the same role for the same client, paying considerably less tax in the process.

Instead of a salary subject to Income Tax and National Insurance, the worker would pay themselves a low salary and take the rest as dividends — which carry lower tax rates and no employee NICs. HMRC’s position was that in substance nothing had changed: these individuals were still employees of their original employer, and the tax saving was artificial.

IR35 does not prevent you from working through a limited company. What it does is apply a test: if your working arrangement with a particular client looks and functions like employment, the income from that contract is taxed as though you are an employee of that client. The limited company structure remains intact — only the tax treatment of income from that specific contract changes.

The three tests that determine your status

HMRC assesses IR35 status using case law built up over more than two decades. In practice, three factors carry most of the weight.

Personal service and substitution. Are you required to perform the work personally, or could you send a qualified substitute in your place? A genuine right of substitution — where the client would accept another suitable person without objection — points toward being outside IR35. If the client is contracting specifically for you and would reject any substitute, that points toward an employment relationship.

Control. Does the client control how, when, and where you work? An independent contractor sets their own working methods and schedule. If the client dictates your hours, your location, and the steps you must follow to complete the work, that level of control points toward employment. Day-to-day line management by the client is a particularly strong indicator.

Mutuality of obligation. Is there an ongoing expectation that the client will offer work and you will accept it? A genuine contractor is engaged to complete a defined scope — when the project ends, neither party is obligated to continue. If there is an implicit understanding that work will always be available and you will always take it, that suggests an employment relationship.

No single test is conclusive on its own. HMRC looks at the overall picture. One strong indicator in one direction can outweigh weaker signals in the other two — which is why blanket conclusions based on contract wording alone are rarely reliable.

Inside vs outside IR35: what actually changes

The financial difference between inside and outside IR35 is substantial. This is not a minor compliance question — it directly affects how much tax you pay on each contract you take on.

On a contract worth £80,000 annually, the difference in tax between inside and outside IR35 can easily reach £15,000–£20,000. That is the practical scale of what this determination means, and why it deserves careful attention before you sign a contract, not after.

Chapter 8 vs Chapter 10: who decides your status

Until April 2017, every contractor assessed their own IR35 status. This still applies today when the end client is a small private-sector company — the self-assessment rule set out in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003.

For engagements with public sector bodies (from April 2017) and medium or large private-sector clients (from April 2021), responsibility for the status determination shifted to the client. This is the Chapter 10 framework, and it changed the landscape significantly.

Under Chapter 10:

• Public sector clients — the public authority determines status and carries liability if they get it wrong
• Medium/large private sector clients — the end client assesses status and must issue a Status Determination Statement (SDS) to the contractor and fee payer (usually a recruiter or agency)
• Small private sector clients (fewer than 50 employees, turnover under £10.2m, balance sheet under £5.1m — at least two conditions must apply) — you still self-assess under Chapter 8

If you work with multiple clients, each contract is assessed independently. Being outside IR35 for one client has no bearing on your status with another — the analysis runs separately for every engagement.

Status Determination Statements: your rights if you disagree

When a Chapter 10 client assesses you as inside IR35, they are legally required to provide a Status Determination Statement — a written document setting out their conclusion and the reasons behind it. If one is not provided, you can request it.

You have the right to dispute the determination. Raise a formal disagreement with the client and they must respond within 45 days, either confirming or revising their assessment. If they revise it and you move to outside IR35, the tax liability position changes accordingly.

Keep every SDS you receive. If you raise a dispute, document the process and outcome in writing. If HMRC later investigates a contract, these records are evidence that status was properly considered — both by the client and by you.

It is worth being clear that an SDS represents the client’s view, not HMRC’s final determination. If you believe an assessment is wrong and cannot resolve it through the dispute process, challenge through the courts is theoretically possible — but it is a significant undertaking and rarely the first step.

If you’re caught: your options and what to do next

Being assessed as inside IR35 on a contract is not the end of the world. It does change the financial picture substantially, and it means several things need revisiting.

Negotiate the rate upward. When a client brings you inside IR35, employer’s NICs (13.8%) become payable on your income. This is an additional cost that was not present when you priced the contract. Many contractors successfully negotiate a higher day rate to account for it — it is a legitimate commercial conversation, and clients with Chapter 10 obligations often expect it.

Choose an umbrella company carefully. Contractors working inside IR35 frequently use umbrella companies to handle PAYE and NIC administration. This is a legitimate route. However, the umbrella market includes schemes that misrepresent what they do and that HMRC has increasingly challenged as disguised remuneration arrangements. Verify that any umbrella you use operates straightforwardly and that the payments made to you are genuine, properly taxed wages.

Assess your full contract portfolio. If you have multiple clients, a determination that one contract is inside IR35 does not affect the others. Your salary and dividend strategy continues to apply to income from outside-IR35 work. Working a mix of inside and outside IR35 contracts simultaneously is common among experienced contractors.

Get contract wording right before signing. IR35 is assessed on the substance of how you actually work, not solely on the wording of a contract. But contracts that genuinely reflect the working arrangement — including a real, exercisable right of substitution — do help, particularly if you ever need to demonstrate your position to HMRC.

The most useful point to seek advice is before you sign a contract, not after receiving a tax bill. A review of the contract and working practices before you commit is almost always worth the cost of the advice.

If you are unsure where you stand on IR35 — or if you have received a status determination you want to challenge — book a free consultation and we will review your contract and working arrangement with you.