IR35 is one of the most talked-about — and most misunderstood — pieces of tax legislation affecting UK contractors and freelancers. If you operate through a limited company and provide your services to clients, you need to understand IR35 and whether it applies to you. Getting it wrong can result in a significant, unexpected tax bill. This guide explains what IR35 is, how it works, and what you need to do to protect yourself.
What Is IR35?
IR35 — formally known as the “off-payroll working rules” — is tax legislation introduced in 2000 to combat what HMRC calls “disguised employment.” The idea is this: if a contractor is providing services through a limited company but their working relationship with the client looks, in substance, like employment, HMRC believes they should pay the same income tax and National Insurance contributions as an employee.
Without IR35, a contractor could theoretically extract money from their company as dividends (which are taxed at lower rates than salary) even though, to all intents and purposes, they are working like an employee of the client business. IR35 is designed to prevent this.
Who Does IR35 Affect?
IR35 can affect anyone who:
- Provides their services through a limited company (or other intermediary)
- Works for clients (end-users) rather than being directly employed
- Has a working arrangement that could be seen as employment if there were no company in between
If you’re a sole trader (not operating through a limited company), IR35 does not directly apply to you in the same way — though similar employment status rules can still be relevant.
Inside IR35 vs Outside IR35 — What’s the Difference?
If your contract falls “inside IR35,” HMRC considers you a disguised employee. Your income from that contract must be paid to you as a “deemed salary” — meaning income tax and NI contributions are deducted at employment rates. You lose the tax advantages of operating through a limited company for that contract.
If your contract falls “outside IR35,” you’re considered a genuine independent contractor. You can continue to extract money from your company as salary and dividends in the usual tax-efficient way.
How Is IR35 Status Determined?
HMRC and employment tribunals look at the actual working relationship rather than just what the contract says. The three most important factors are:
1. Substitution
Can you send a substitute to do the work if you’re unavailable? A genuine contractor should be able to send someone else (at their own cost) to fulfil the contract. If the client insists on you personally, this points toward employment.
2. Mutuality of Obligation (MOO)
Is the client obliged to offer you work, and are you obliged to accept it? In a true contractor relationship, there’s no expectation of ongoing work and no obligation to accept it. If there’s a standing arrangement where work is automatically offered and accepted, this looks more like employment.
3. Control
Does the client control how, when, and where you work? An employee is typically told when to arrive, what to do, and how to do it. A contractor decides for themselves how to complete the work and achieve the agreed outcome. High levels of client control point toward employment.
Other relevant factors include financial risk (does the contractor bear financial risk?), equipment (who provides it?), and integration (how deeply integrated into the client’s business is the contractor?).
Who Decides IR35 Status — You or the Client?
Since April 2021 (following the Off-Payroll Working Rules reform), the responsibility for determining IR35 status has shifted:
- If the client is a medium or large private sector company (or a public sector body): the client is responsible for determining your IR35 status and providing you with a Status Determination Statement (SDS).
- If the client is a small company (meeting two of: fewer than 50 employees, turnover under £10.2m, balance sheet under £5.1m): you (the contractor’s company) remain responsible for determining IR35 status.
How to Protect Yourself from IR35
The best protection is ensuring that your contracts and working practices genuinely reflect an outside-IR35 position. Key steps include having your contracts professionally reviewed to ensure they include substitution clauses and correctly reflect your independence; working practices that match what the contract says (a great contract won’t help you if day-to-day reality looks like employment); working for multiple clients where possible; using your own equipment; issuing invoices and managing your own admin professionally. Our freelancer and contractor accounting service includes IR35 guidance and contract review support.
What Happens If You’re Found Inside IR35?
If HMRC determines that your contract should have been inside IR35, you’ll face a substantial tax bill covering the income tax and NI contributions you should have paid as an employee — potentially going back several years — plus interest and penalties. These investigations can be extremely stressful and costly. This is why it’s essential to get proper IR35 advice before signing contracts, not after.
ProKeeper’s IR35 Support for Contractors
At ProKeeper, we work with contractors across the UK to assess IR35 risk, review contracts, and ensure their working arrangements support an outside-IR35 position where appropriate. We also provide full contractor accounting services — from payroll and company accounts to VAT and self assessment. Book a free IR35 consultation today.
Don’t wait until HMRC comes knocking. Talk to ProKeeper about your IR35 position today.