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ContractorsUpdated 2026-02-12

What is IR35?

Quick Answer

IR35 is legislation that determines whether a contractor is genuinely self-employed or should be taxed as an employee. If IR35 applies, you pay similar taxes to an employee.

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Detailed Explanation

IR35 (officially called the 'off-payroll working rules') prevents contractors from avoiding employment taxes by working through a limited company when they would otherwise be considered an employee.

How IR35 status is determined

Three key tests:

1. Substitution

Could you send someone else to do the work? 2. **Control

Who determines IR35 status? - Medium/large private sector clients

The client determines your status - **Public sector clients

Small company definition

Less than 2 of: £10.2m turnover, £5.1m assets, 50 employees

Inside IR35 (caught)

- Client/agency deducts PAYE and NI before paying your company - You're taxed similarly to an employee - You can still claim some business expenses

Outside IR35 (not caught)

- You receive gross payments to your company - You choose how to extract profits (salary/dividends) - More tax-efficient

Evidence to support outside IR35

- Written contracts with substitution clause - Evidence you control your own work - Working for multiple clients - Providing your own equipment - Genuine business risk

Source: HMRC Off-Payroll Working Rules

Real-World Examples

Website Designer's Contract Review

Sarah, a website designer, works for a large marketing agency. Her contract states she must use their equipment, follow their design guidelines precisely, and work from their office three days a week. This suggests a high degree of control, potentially placing her inside IR35.

IT Consultant's Project-Based Work

John, an IT consultant, is hired for a specific six-month project to implement a new CRM system. His contract clearly defines the deliverables, but he decides his own working hours and methodology. He also has the right to send a substitute if he is unavailable. This suggests he is outside IR35.

Accountant Providing Temporary Cover

An accounting firm hires David to cover for an employee on maternity leave for 9 months. He uses his own laptop, sets his own schedule (within reason), but is expected to follow the firm's internal accounting processes. This borderline case requires careful consideration of all factors.

Common Mistakes to Avoid

  • Ignoring IR35 completely, assuming it doesn't apply without properly assessing your contracts and working practices.
  • Relying solely on a written contract without considering the actual day-to-day working relationship; HMRC will look beyond the paperwork.
  • Failing to document IR35 assessments and the reasons for your determination, leaving you vulnerable in case of an HMRC inquiry.
  • Assuming that because you have multiple clients, IR35 can't apply, but IR35 applies client by client.

What is a Status Determination Statement (SDS)?

If your client is a medium or large-sized business, they are legally required to provide you with an SDS explaining their IR35 determination and the reasons behind it. This allows you to understand their decision and challenge it if necessary.

How does the '5% allowance' relate to IR35?

The 5% allowance, which allowed contractors inside IR35 to deduct 5% of their income to cover administration costs, was removed in April 2021 for engagements where the end client is responsible for determining IR35 status. It is not available in these scenarios.

What is deemed payment and how does it relate to IR35?

A deemed payment is the payment made to the contractor after deductions for Income Tax and National Insurance if IR35 applies. The 'fee-payer' (usually the agency or the end client) is responsible for calculating and paying these deductions to HMRC.

What are the potential penalties for non-compliance with IR35?

Penalties for non-compliance can be significant and may include unpaid Income Tax and National Insurance Contributions, plus interest and penalties levied by HMRC. The fee-payer is primarily liable if they incorrectly determined the IR35 status.

Practical Tips

  • Review your existing contracts with clients to assess your IR35 status based on the three key tests: Substitution, Control, and Mutuality of Obligation.
  • Document your IR35 assessments for each client engagement, detailing the factors considered and the rationale behind your determination; use HMRC's CEST tool as a starting point, but don't rely on it solely.
  • If your client is making the IR35 determination, ask for a copy of their Status Determination Statement (SDS) and challenge it if you disagree with their assessment; provide evidence to support your position.
  • Consider taking out IR35 insurance to cover the costs of defending an HMRC investigation and any potential tax liabilities if your IR35 status is challenged.

Related Questions

What is the Construction Industry Scheme (CIS)?

CIS is a tax deduction scheme where contractors deduct tax from payments to subcontractors. Standard deduction is 20%, or 30% for unregistered subcontractors. Some get 0% (gross payment status).

Browse all questions →

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