What IR35 actually is
IR35 (formally "the off-payroll working rules") is the UK's anti-avoidance legislation for contractors who work through their own limited company. It exists because, without it, anyone could quit their job, set up a personal service company (PSC), and re-contract back to the same employer on much better tax terms — extracting money as dividends instead of salary and dodging employer NI entirely.
The rules ask one fundamental question: strip away the limited company. What does the engagement actually look like?
- If it looks like genuine self-employment → outside IR35. Contractor tax rules apply. Your Ltd takes the fee, pays corporation tax, you take dividends.
- If it looks like employment in disguise → inside IR35. The fee is taxed as employment income: PAYE income tax, employee NI, plus employer NI on top. Net take-home is typically 20–30% lower than the outside-IR35 equivalent.
The three primary factors
UK case law has settled on three primary tests, all of which trace back to the 1968 case Ready Mixed Concrete (South East) Ltd v Minister of Pensions. HMRC's CEST tool and every tribunal since asks the same questions:
1. Mutuality of Obligation (MOO)
Is the client obliged to offer you more work, and are you obliged to accept it? Employees have ongoing MOO — your boss can give you any reasonable task and you must do it. Contractors have project MOO only — the client pays for the agreed deliverable, but can't suddenly redirect you to something else without renegotiating.
Outside signal: Each piece of work is its own engagement. No expectation of continuation. The client could stop using you tomorrow with no notice owed; you could decline the next piece without explanation.
Inside signal: Rolling contract, automatic extension, "they always have something for me", no defined end.
2. Personal Service (substitution)
If you couldn't do the work next Tuesday, could you genuinely send someone else (qualified, vetted) in your place? Genuine self-employment usually allows substitution; employment doesn't.
Outside signal: Contract explicitly allows substitution, you have a register of associates you've used or could use, the client cares about the work being done not who does it.
Inside signal: Contract requires you specifically. Substitution clause exists on paper but the client would refuse in practice.
3. Control
Who decides how, when, where, and what work you do? Employees are directed; contractors decide.
Outside signal: Client agrees outcomes, you choose method. You set your own hours within the deadline. You work where you want. You decline tasks outside the scope of the contract.
Inside signal: Client tells you how to do the work. You attend mandatory daily stand-ups. You must be in their office during their hours. You do whatever's asked, however small.
If all three primary factors point clearly one way, that's usually decisive. When they're mixed, the secondary factors break the tie.
The secondary factors
These don't decide simple cases but tip borderline ones:
- Financial risk. Do you bear genuine downside — fixed-price commitments, rework at your cost, insurance liability? Contractors do; employees don't.
- Multiple clients. Are you working for several clients concurrently, or is this your only engagement?
- Equipment. Whose laptop, software, tools? Own kit signals contractor.
- Integration. Are you "part and parcel" of the client's organisation — line managed, attend appraisals, get team perks, named on their org chart?
- Length. Long unbroken engagements at one client are a strong inside indicator. Project-based work is outside-friendly.
- Intention. Do both parties intend an employment relationship or a B2B one? Documented intention helps but doesn't override reality.
Who decides your status?
This is where the rules changed materially in 2017 (public sector) and 2021 (private sector).
Small private-sector clients
If your end client is a "small" private-sector business (under £10.2m turnover, fewer than 50 employees, or less than £5.1m balance sheet — two of three), you determine your own IR35 status. The risk and tax liability sit with you and your company.
Medium/large private-sector and all public-sector clients
The end client determines status under the off-payroll working rules. They must issue a Status Determination Statement (SDS) explaining their reasoning. If they decide "inside", the fee-payer (usually the agency in the middle) deducts PAYE and employee NI from your rate before it reaches your company.
This shift is why many UK contractors got pushed inside IR35 from 2021 onward — risk-averse clients blanket-classified all their contractor pool as inside rather than do contract-by-contract assessments.
How much does it actually cost you?
Roughly, on a £500/day contract (~£100k annual gross):
- Outside IR35 — operate through your Ltd, salary £12,570 + dividends, corporation tax + dividend tax. Net take-home around £73,000–£75,000.
- Inside IR35 — fee taxed as employment via the engager or umbrella. After PAYE income tax, employee NI, and the employer NI (often deducted from your gross), net take-home around £55,000–£60,000.
That's a gap of roughly £15,000–£20,000 a year at this rate — for the same gross fee. It's why IR35 is the single most consequential UK tax line for contractors.
Use our limited-company take-home calculator for the outside-IR35 maths and our self-employed tax calculator to model the inside scenario.
How to defend an outside-IR35 position
If you operate outside IR35 and HMRC investigates, the burden of proof is on you. You're looking for evidence that the working pattern matches what the contract says. The strongest defences:
1. A properly-worded contract
It should explicitly include: substitution rights without unreasonable veto; no Mutuality of Obligation; you control how and when the work is done; B2B terms (not employment language). Generic templates from agencies often fail. Pay for a specialist contract review — Qdos, Kingsbridge, Markel, IPSE+ all offer reviews from ~£100–£300, often with insurance-backed opinion.
2. Working practices that match
This is what tribunals look at most closely. If your contract says you can substitute but you never have and would be refused, the contract is worthless. If your contract says no MOO but you've worked exclusively at the client for 3 years with auto-renewing extensions, the contract is worthless. Keep evidence: emails confirming substitution rights, examples of declined work, your other client engagements.
3. Multiple clients (or at least the demonstrated capacity)
Concurrent clients is the gold standard. If you're working one client full time, at least keep your business externally visible — website live, other prospects in the pipeline, public marketing.
4. IR35 insurance
Specialist insurers (Qdos TLC35, Kingsbridge IPSE+, Markel Tax Liability) provide cover for HMRC investigation costs and potentially the back-tax bill. Typical cost £200–£400/year. Worth it if you've operated outside IR35 for years and would suffer a six-figure liability.
Practical next steps
- Run the IR35 status quick-check to get a fast read on your current engagement.
- If outside or borderline, get a paid contract review from an IR35 specialist. £100–£300 once-off, ideally with insurance backing.
- If you're a contractor at a medium/large client, ask for the Status Determination Statement in writing. They're legally required to provide it.
- If you're inside IR35 and accepting the engagement, model the take-home with our calculators before signing — make sure the gross rate covers the tax hit.
- Keep evidence year-round — substitution rights exercised or offered, declined work, multiple clients, your own equipment, your business marketing. The audit trail is what protects you if HMRC asks.
No — IR35 specifically targets contractors working through their own limited company or partnership. Sole traders fall under separate employment-status rules (broadly similar tests, different legal framework).
HMRC's Check Employment Status for Tax tool. If used honestly, HMRC will usually stand by its verdict — though tribunals have occasionally overturned CEST outcomes. It's a useful starting point, but specialist review beats it for borderline cases.
Yes — and many contractors do, to keep one business entity active. The Ltd receives the post-PAYE-tax net amount, retains a small margin, and pays the rest to you. Tax efficiency is largely gone but you keep your VAT registration, professional standing, and continuity.
Back-tax for up to 6 years (or 20 if "deliberate"), plus interest and penalties. For a contractor on £500/day who's been outside for 4 years, the bill can exceed £100,000. This is why IR35 insurance and proper contract reviews are worth their cost.
No. Tribunals look at working practices, not paperwork. A perfect contract is worthless if your day-to-day working pattern is employment.
Sometimes — if the gross rate is high enough to cover the tax hit and the work is genuinely good. Run the numbers first. A 20–30% take-home reduction means you'd need a ~30% higher gross rate inside-IR35 to match outside-IR35 net.
An intermediary that employs you for the contract's duration and runs PAYE on your fees. Bypasses IR35 entirely (you're a deemed employee), but the umbrella deducts employer NI from your gross rate and takes a margin. Often used for inside-IR35 contracts where the contractor doesn't want to operate their own Ltd.
This guide is general information about UK IR35 rules and case-law principles. It is not legal or tax advice. For decisions affecting your engagement, consult an IR35 specialist (Qdos, Kingsbridge, Markel, IPSE+) or a qualified accountant.