IR35 Explained: What Every UK Contractor Needs to Know

IR35 — officially the “Intermediaries Legislation” — was introduced in 2000 to target what HMRC called “disguised employment.” The concern: someone would leave a permanent job on Friday, set up a limited company over the weekend, and return on Monday to do exactly the same job for the same employer, but now saving thousands in tax by taking dividends instead of salary.

IR35 says: if your working arrangement is effectively employment — same control, same hours, same ongoing commitment — you should be taxed like an employee, regardless of how the contract is structured.

The legislation has been tightened repeatedly. Since April 2017 for public sector contracts, and April 2021 for medium and large private sector contracts, the client has been responsible for determining your status (not you). This shifted significant risk onto hirers and changed the contracting landscape.

The difference between inside and outside IR35 is dramatic. Assume a contractor invoicing £100,000/year through their own limited company:

• Outside IR35: Pay corporation tax on profits, extract as salary + dividends, keep approximately £75,000-80,000 after tax.
• Inside IR35: Income taxed like employment — employer NICs, employee NICs, and income tax. Keep approximately £55,000-65,000.

That's a difference of £15,000-25,000 per year. And if HMRC retroactively decides you were inside IR35 for the last 6 years, you could owe that difference multiple times over, plus interest and penalties.

This is the most misunderstood part of IR35. It depends on your client:

• Public sector clients:Since April 2017, the client determines your status. If they say inside, you're taxed via PAYE through the client (or their agency).
• Medium/large private sector clients(turnover > £10.2m OR balance sheet > £5.1m OR >50 employees): Since April 2021, the client determines your status using a Status Determination Statement (SDS).
• Small private sector clients:You're still responsible for your own IR35 determination. This is increasingly rare for professional contracting work.

When the client determines your status, they must issue you a written Status Determination Statement explaining why. If you disagree, you have the right to challenge it through the client's dispute process.

IR35 status comes down to a picture built from many factors, but three tests dominate the assessment. These come from decades of employment status case law.

1. Control

Who decides how, when, and where the work is done? Employees are controlled by their employer. Genuine contractors have autonomy over how they deliver the agreed outcome.

Strong outside-IR35 indicators: you set your own hours, choose your own tools and methods, work where you want, and are judged on deliverables rather than hours worked. Strong inside-IR35 indicators: you must attend at set hours, use client equipment, follow client procedures, and report to a line manager.

2. Substitution

If you can't make it, can you send someone else — at your cost, with your qualifications — to do the work in your place? A genuine contractor can. An employee cannot. This is the test courts weight most heavily.

Your contract should contain an unfettered right of substitution — the client cannot unreasonably refuse a qualified substitute. In practice, most contracts include substitution clauses that have never been tested, which weakens the protection. You don't need to actually have sent a substitute — just a genuine, unfettered right to do so.

3. Mutuality of Obligation (MOO)

Is the client obliged to offer you work, and are you obliged to accept it? For an employee, yes — there's an ongoing obligation on both sides. For a contractor, no — you're engaged for a specific project or deliverable. Once it's done, the engagement ends.

Rolling contracts with no fixed end date, guaranteed hours, or expectation of “whatever work needs doing” all point to mutuality of obligation.

Beyond the three main tests, HMRC and the courts look at the whole picture. These additional factors can tip a borderline case:

• Financial risk: Do you bear genuine business risk (unpaid invoices, fixing errors at your own cost)? Employees don't.
• Equipment: Do you provide your own laptop and tools, or use the client's?
• Multiple clients: Working for several clients simultaneously strongly indicates outside IR35.
• Integration: Are you “part and parcel” of the client's organisation — on the intranet, in team meetings, with a company email? Employee-like.
• Benefits: Do you get holiday pay, sick pay, pension contributions, or training budget? All point to employment.
• Business identity: Do you have your own website, business cards, professional indemnity insurance, and multiple clients? These support outside-IR35 status.

HMRC's Check Employment Status for Tax (CEST) tool is the official online assessment. Clients often use CEST to produce their Status Determination Statement.

CEST has well-documented flaws. It has no question on Mutuality of Obligation (which HMRC controversially argues is always present in contracts for services — a position not supported by case law). The tool has produced different results for contractors in materially identical situations. And HMRC themselves have lost multiple tribunal cases where they'd previously accepted the contractor was outside IR35 via CEST.

A crucial point many contractors miss: the contract doesn't determine your IR35 status. The actual working arrangement does.

You can have a perfectly-drafted outside-IR35 contract with strong substitution clauses and clear project scope — but if in practice you're turning up at 9am, attending the daily standup, reporting to a manager, and doing whatever work comes in, HMRC will find you inside IR35 regardless of what the contract says. Courts look at the reality of the engagement.

This is why many contractors get caught out: their contracts are fine, but their behaviour looks like employment. The advice is simple but hard to follow: act like a business, not an employee.

Whether you're starting a new contract or already in one, these steps reduce your IR35 risk:

1. Get your contract reviewed— specialist reviewers (Qdos, Bauer & Cottrell, Markel) charge £200-400 and identify clauses that weaken your position. Cheap insurance.
2. Review your working reality— is your day-to-day actually different from the employees around you? If no, that's a red flag regardless of contract wording.
3. Get IR35 insurance— Qdos TLC35, Markel's cover, or similar. £200-500/year to cover legal defence costs and potential tax liability if investigated.
4. Keep evidence — save emails showing you refused additional work, set your own hours, used your own equipment, worked for other clients. Documented evidence is invaluable if HMRC investigate.
5. Have multiple clients — where possible, maintain ongoing relationships with several clients. Single-client contracts are the highest risk.
6. Run your business like a business — website, business cards, professional insurance, your own equipment, invoices issued from your company, separate business bank account. Not just a tax structure — a genuine business.

HMRC can open an IR35 enquiry going back 4 years (or 6 if they allege carelessness, or 20 if they allege deliberate behaviour). The process typically looks like:

1. HMRC writes to your company requesting contract and working practice details
2. You (with your accountant or IR35 specialist) respond with evidence
3. HMRC issues an opinion on status
4. If you disagree, the case may go to First-tier Tribunal
5. From there, potentially to the Upper Tribunal or Court of Appeal

The financial stakes are real. Recent high-profile cases: Gary Lineker fought HMRC over £4.9m (and won); Adrian Chiles won his £1.7m case; Lorraine Kelly won her £1.2m case. Many lower-profile contractors have lost and faced life-changing tax bills.

This is why IR35 insurance matters — the policy covers your legal defence costs, which can easily run into tens of thousands of pounds even for a clearly defensible case.

IR35 is genuinely complex and the stakes are high. But for most contractors, the principles are straightforward: act like a business, document the reality of your working arrangement, get your contract professionally reviewed, and carry insurance.