IR35 Explained: Off-Payroll Working Rules for Contractors

IR35 — formally the off-payroll working rules — exists to stop what HMRC calls disguised employment: working like an employee while billing through a limited company to pay less tax. If a contract is inside IR35, the tax advantage of your company largely disappears for that engagement.

Who decides your status

Since April 2021 in the private sector (and 2017 in the public sector), medium and large clients decide the IR35 status of their contractors and must issue a Status Determination Statement explaining their reasoning. If your client is small — meeting the Companies Act small-company definition — the responsibility stays with you.

What inside and outside mean in money terms

• Inside IR35: the fee payer deducts income tax and National Insurance like payroll. You broadly take home what an employee would, without employment rights.
• Outside IR35: you invoice gross and choose your own salary/dividend mix — the tax-efficient contracting model.

The tests HMRC applies

Status is judged on the reality of the working relationship, not the label in the contract. Three factors dominate:

• Substitution: could you genuinely send someone else to do the work, and would the client accept them? A real right of substitution points strongly outside IR35.
• Control: does the client control how, when and where you work, beyond what any business would specify in a brief? Heavy control looks like employment.
• Mutuality of obligation: is the client obliged to offer ongoing work, and are you obliged to accept it? Project-by-project engagement points outside.

Secondary factors include whether you provide your own equipment, carry financial risk, work for multiple clients, and are integrated into the client's organisation — things like a staff email address, appearing on the org chart or attending the office party.

Protecting yourself

• Read the Status Determination Statement carefully and challenge it through the client's disagreement process if you think it is wrong.
• Make sure your contract and your actual working practices match — a great contract means nothing if day-to-day reality says employment.
• Keep evidence: substitution clauses exercised or offered, multiple concurrent clients, your own insurance and equipment.
• Consider professional IR35 contract reviews and status insurance if contracting is your main income.