You may have heard of the term ‘IR35’ mentioned in the Contractor and Freelancer market– but what is it? Let us simplify things for you.

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What is IR35?

The IR35 legislation was introduced in 2000 to clamp down on the practice of ‘disguised employment’.

At the time, employees could leave their permanent roles and return a few days later to do the same job through a limited company.

This would result in retaining all the benefits of a permanent employee whilst benefiting from the tax-saving opportunities available to limited company owners.

If you need help with any aspect of IR35, there are many avenues of support available from both the legal side of contract law and tax treatment of the revenue generated.

What is disguised employment?

Disguised employment describes situations in which an individual works in the same way as a permanent employee but is paid through a limited company for tax purposes.

Some typical examples of disguised employment are:

  • resigning from permanent employment and returning to the same role through a limited company.
  • working under the same supervision and working conditions as an employee.
  • receiving tax advantages while carrying out work identical to that of an employee.

IR35 and the Off Payroll Working rules

The original IR35 rules came into force in 2000 and placed the responsibility for assessing status on the contractor’s limited company.

The Off Payroll Working rules, introduced in 2017 and extended in 2021, transfer that responsibility to the client for first public sector bodies and then for medium or large private sector organisations.

1.    IR35 (the rules under Chapter 8 ITEPA 2003)

These rules apply when you contract with a small company client (as defined under the Companies Act) or with an overseas client that has no UK presence.

The small company exemption

To meet the definition of a small company, the client must meet at least two of the following:

  • annual turnover of £15 million or less
  • balance sheet total of £7.5 million or less
  • 50 employees or fewer

If the client meets this definition, they are likely to be exempt from the Off Payroll rules. This means you, as the contractor and limited company director, must assess your own IR35 status and operate the original IR35 rules via your limited company.

2. Off Payroll Working rules (Chapter 10)

Under these rules, the end client decides whether the engagement is inside or outside IR35.

If the client concludes that the role is inside IR35, the fee payer, such as the agency, must deduct PAYE and National Insurance before paying your limited company.

To read the official HMRC guidance, visit IR35 and Off Payroll: find out if it applies.

How IR35 is assessed in practice

Employment status is determined using longstanding legal principles supported by decades of case law.

However, what matters more than anything is the reality of the situation – how a contract is performed on a day-to-day basis.

A professional IR35 reviewer will look at both:

  • The written contract that sets out the agreed terms.
  • The actual working practices that show how the role operates in reality.

If the contract wording suggests an outside IR35 arrangement but the working practices resemble employment, the working practices typically carry more weight.

What about HMRC’s CEST tool?

Many clients use HMRC’s CEST tool (Check Employment Status for Tax) to help work out an individual’s IR35 status.

It can be a helpful starting point but cannot cover every scenario.

HMRC will not automatically stand by a CEST result if the inputs do not reflect the reality of the contract. This is why professional reviews remain so important.

How do I know if I am inside or outside IR35?

Key IR35 status factors

The following factors help determine whether the contract is to be treated as inside or outside IR35:

1. Right of substitution

Is the client hiring you (the individual) or your limited company to do the job?

If your company doesn’t have a genuine right to provide a substitute, this is a strong indictor towards an inside IR35 contract.

2. Mutuality of obligation (MOO)

Mutuality of obligation (MOO) is about whether the client is expected to keep providing your company with work and whether your company is expected to keep accepting the work.

If you are a contractor operating in business on your own account, you will typically work on fixed-length projects.

If your company has  one continuous contract of open-ended work, via multiple contract renewals, this may be deemed as disguised employment which would indicate an inside IR35 contract.

3. Control

Does the contract put you under the direction, supervision and control of your client?

If the client decides your working hours, how you work, and where you work, this could indicate that you are an employee.

Naturally, there will be a level of security to be taken into consideration in certain situations that require these factors to be dictated by the client; highlighting that working practices  are vital in deciding whether the contract is an inside IR35 or outside IR35 contract.

However, ultimately, you, as a company, should not be under anyone’s direct control or supervision.

Some supporting IR35 factors

Alongside the three key aspects above,  the following is a short list of pertinent factors.

  • whether you take financial risk
  • whether you provide your own equipment
  • whether you work with multiple clients
  • whether you market your services as a business
  • whether you are integrated into the client’s organisation

For more guidance on IR35, speak to one of our accountants for a FREE verbal IR35 review on 0207 0962659 or complete our call back request form here.

Status Determination Statements (SDS)

Under the Off Payroll rules, medium and large clients must give the contractor a Status Determination Statement before the engagement starts.

The SDS must state whether the role is inside or outside IR35 and set out the reasons for that conclusion. The client must also pass the SDS to the next party in the supply chain, usually the agency, so that the correct tax treatment can be applied.

An SDS is only valid if the client has taken reasonable care when making the decision. A short or generic statement with no explanation does not meet this requirement.

The Client Led Disagreement Process

You can challenge an SDS if you think it’s wrong. Once you’ve provided your reasons and any evidence, the client is obliged to review their original decision – and take reasonable care when they do it.

They can stand by the original decision, but they must show they have reconsidered it properly and explain how they reached their conclusion.

The contractor’s IR35 status remains the same unless the SDS decision is reversed.

IR35 insurance for limited company contractors

If you are working for a medium or large client, they must issue an SDS. If the client is small, you are responsible for determining your own status under the original IR35 rules.

Contractors who work for small clients and assess their own status under Chapter 8 often take out IR35 insurance or broader tax investigation cover.

It can help with the cost of professional representation if HMRC ever launches a tax investigation into your limited company. This is typically taken as a precautionary measure. While HMRC generally does not penalise minor, isolated mistakes, they do take a stricter view of ‘careless’ or persistent errors. In such instances, HMRC has the power to backdate an investigation and recover unpaid tax for up to six years.

What happens if you are inside IR35?

Being inside IR35 does not mean you must stop using your limited company. The right approach depends on how long the contract will last and whether you expect future work to fall outside IR35.

If you continue trading through your limited company

  • The fee payer deducts PAYE tax and National Insurance before paying a deemed salary to your company.
  • Your ability to claim company expenses is far more limited.
  • Your company still needs to submit annual accounts and meet its other statutory obligations.
  • Your VAT responsibilities continue if you are registered.

Some contractors consider switching to an umbrella company if they take on an ‘inside IR35’ contract, although this isn’t necessarily always the right thing to do long term. Contracting is an unpredictable career choice, and your next assignment may fall outside IR35. If you keep your limited company open, it can provide  the flexibility to easily move between inside and outside IR35 contracts.

Your take-home pay may still be higher through your limited, even if you work inside IR35. It depends on your own circumstances.

If you work through an umbrella company

  • The umbrella company becomes your employer and deducts employment costs and personal tax from your contract income.
  • You do not need to invoice or manage VAT.
  • This route is often used for short engagements or where a client will not engage limited companies.

If you are unsure which route is best, our expert accountants can help discuss your options, including our EasySwitch Accountancy Package. This allows you the flexibility of switching between your own Ltd Company and the use of an Umbrella Company provider from our vetted recommended partners.

What to do next

We are here if you need help with IR35, understanding your IR35 status, or reassurance before taking on a new contract. Simply call us on 0207 096 2659 or book a no obligation discovery call with one of our expert accountants.

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