IR35 is a tax rule for people who work through their own limited company (a personal service company, or PSC) or another intermediary. It asks whether, if you had been engaged directly by the client, you would have been its employee. If the answer is yes, the engagement is “inside IR35” and income tax and National Insurance are due broadly as if you were employed. Your contract is an important part of that picture, though not the whole of it.
What IR35 is
The name comes from the number of the 1999 Inland Revenue press release that announced it. The rules took effect in April 2000, are now in the Income Tax (Earnings and Pensions) Act 2003, and were aimed at people leaving a job on Friday and returning on Monday to do the same work through their own company.
IR35 only applies where there’s an intermediary. If you contract as a sole trader, IR35 isn’t the question; the client instead has to consider whether you’re actually an employee for PAYE purposes. And IR35 is only about tax. Being inside IR35 doesn’t give you employment rights against the client.
Who decides your status
That depends on the client.
Public sector clients, and medium or large private sector clients. The off-payroll working rules apply. They’ve applied in the public sector since April 2017 and to medium and large private sector businesses since April 2021. The client must decide whether the engagement is inside or outside IR35, take reasonable care in doing so, and give you (and the next party in the chain, such as an agency) a status determination statement explaining its conclusion and reasons. If it’s inside, whoever pays your company (the “fee-payer”, which may be the client or an agency) deducts income tax and employee National Insurance from the fee and pays employer National Insurance on top.
Small private sector clients. Your own company decides whether IR35 applies, and if it does, the company has to account for tax on a “deemed employment payment” at the end of the tax year. Whether a client is small is based on the Companies Act 2006 size tests (turnover, balance sheet total and number of employees), so check with the client rather than guessing from its size.
If the client has no UK presence, the off-payroll rules generally don’t apply and your company makes the decision, but take advice if that’s your situation.
Who pays if the decision is wrong
Under the off-payroll rules, the fee-payer is primarily liable if tax should have been deducted and wasn’t. Liability can shift to the client if it didn’t take reasonable care or didn’t give a proper status determination statement, which is one reason some clients treat everything as inside IR35. Where your own company makes the decision, the risk sits with your company.
The status tests
The test is the employment status test, applied to a hypothetical direct contract between you and the client, looking at how the engagement works in practice as well as the written terms. The main factors are:
Personal service and substitution. Must you do the work personally, or could your company genuinely send someone else? A real right of substitution, which the client can’t refuse without good reason, points strongly towards outside IR35. A clause that exists on paper but that everyone knows would never be used carries little weight.
Control. Can the client direct how, when and where you work, as it would an employee? Specifying deliverables and deadlines is normal in any business contract.
Mutuality of obligation. Is there an ongoing obligation on the client to offer work and on you to do it, of the kind you’d see in employment?
Other factors. Financial risk (for example, having to fix defective work at your own cost), working for other clients, using your own equipment, how long the engagement lasts, and whether you’re integrated into the client’s organisation, such as managing its staff or getting employee-style benefits. No single factor is decisive.
Contract clauses that matter
Substitution. Look for a clause letting your company provide a suitably qualified substitute, at its own cost, with the client’s right to refuse limited to reasonable grounds such as security clearance or skills. For example: “The Consultancy may provide a suitably qualified substitute to perform the Services. The Client may only refuse a substitute on reasonable grounds relating to the substitute’s qualifications or security clearance.”
Control and method. Wording that leaves the method of work to your company, with the client specifying deliverables and deadlines, supports outside status. Clauses requiring you to follow the client’s staff policies, work set hours or report to a line manager point the other way.
Scope and duration. A defined project or set of deliverables, with an end date, fits a business-to-business engagement better than an open-ended role doing whatever the client needs.
Other clients. A clause allowing your company to work for others, subject to conflicts and confidentiality, is consistent with being in business on your own account. Exclusivity leans towards employment.
Financial risk and payment. Fixed fees for deliverables, and an obligation to correct defective work at your own cost, show commercial risk. Payment by the day for time spent, regardless of outcome, is common in both inside and outside engagements, so it isn’t decisive on its own.
Well-drafted clauses help only if they reflect what actually happens; HMRC looks at the reality.
Practical steps
Ask for the status determination statement before you start. If the off-payroll rules apply, you’re entitled to one. If you disagree with it, you can ask the client to reconsider; the client must respond within 45 days, either confirming its decision with reasons or changing it.
Use HMRC’s tool, carefully. HMRC’s Check Employment Status for Tax (CEST) tool gives a view on status, and HMRC says it will stand by the result if the information you enter is accurate and the tool is used in line with its guidance. It doesn’t always give a determination, and its approach to some factors has been criticised, so many contractors also get a review from an accountant or IR35 specialist.
Keep records. Keep evidence of how you actually work: substitutes used, other clients, your own equipment and methods. In an HMRC enquiry that evidence matters as much as the contract.
Price the engagement for its status. An inside IR35 engagement leaves you with considerably less after tax than an outside one at the same rate, so agree the rate once you know the status, not before.
Getting the contract checked
Before you commit to a longer engagement, it’s worth checking that the written terms support the status you’ve been told applies. QuickLegalCheck reviews consultancy agreements and flags clauses that bear on IR35, such as substitution, control and exclusivity, in plain English. It doesn’t give a formal status determination or tax advice. To see how it compares with other options, have a look at our comparison page.
Related: what the consultancy agreement review covers, and a complete sample report.