If you’re a contractor, freelancer, or run your own limited company, you’ve probably heard of IR35 — but what is it, and why does it matter?
What is IR35?
IR35 is shorthand for off-payroll working rules introduced by HMRC. These rules are designed to tackle what’s known as “disguised employment” – where someone works like an employee but bills through a limited company, usually for tax advantages.
The IR35 legislation looks at the nature of the working relationship. If, in practice, you’re working as an employee (e.g. you have fixed hours, use the client’s equipment, and take instructions like a member of staff), then HMRC may say you fall inside IR35 – and you should be taxed like an employee.
On the other hand, if you’re truly operating as a business — working for multiple clients, controlling how and when you work, and taking on financial risk — you may fall outside IR35, and continue to be taxed under your company’s structure.
Why Does it Exist?
HMRC wants to ensure that people who are essentially employees pay the same tax and National Insurance as actual employees. Without IR35, someone might avoid employee taxes by simply forming a company, even though nothing else changes about how they work.
IR35 is HMRC’s way of closing that loophole.
How Does it Affect You?
If You’re a Contractor or Freelancer
- Inside IR35: You’ll be taxed like an employee. You’ll pay Income Tax and National Insurance at source, and you won’t be able to use the same dividend and expense advantages you’d get running a limited company.
- Outside IR35: You can pay yourself via dividends, claim business expenses, and benefit from more favourable tax treatment.
Since April 2021, if you’re working with a medium or large private-sector client, it’s their responsibility to assess your IR35 status — not yours. But if you’re working with a small private company, the responsibility still sits with you.
If You Hire Contractors
If your business uses contractors who work through their own limited companies, you need to assess whether IR35 applies to each engagement. If it does, you may need to deduct tax and NICs and pay employer NICs. Failing to do this correctly can result in HMRC coming after you for unpaid tax.
What Determines IR35 Status?
There’s no single test, but HMRC looks at a combination of factors:
- Control – Who decides how, when, and where the work is done?
- Substitution – Can you send someone else to do the work?
- Mutuality of Obligation (MOO) – Is the client obliged to keep offering work and are you obliged to accept it?
There are other considerations, too, like whether you’re using your own equipment, whether you’re part of the client’s org chart, and how you’re paid.
What Can You Do?
There are a number of things you can do:
- Review your contracts – Make sure they reflect a genuine business-to-business relationship.
- Consider getting a professional review – Especially if you work via a limited company.
- Use HMRC’s CEST tool – The “Check Employment Status for Tax” tool is flawed, but it gives a view of what HMRC might think.
- Keep records – If you’re working outside IR35, keep evidence of your working practices (emails showing independence, substitution clauses, etc).
IR35 can seem like a dry bit of legislation, but it has a real impact — on your income, how you work, and how you engage clients or contractors. With the rules shifting in recent years, it’s worth taking the time to understand where you stand, and get help if you’re unsure.
