In the contracting world, IR35 is a mythical beast.
Both new and seasoned contractors have heard, and possibly read terabytes of content, about it. Many fear it. But there are also a lot of misunderstandings around how it works and its impact on your bottom line.
So what is IR35, exactly? And how have controversial changes to IR35 (the ‘off payroll working’ rules) changed things following their introduction in April 2021?
Here is our comprehensive beginner’s guide to IR35 and Off-Payroll. Last updated in September 2025.
IR35 is the term given to a set of tax avoidance rules that crack down on ‘disguised employment’. If your work falls within its scope, you’ll be treated as an employee for tax purposes, even though you’re self-employed.
IR35 takes its name from Inland Revenue Press Release 35, the press release that announced the impending arrival of the Intermediaries Legislation over 20 years ago.
At the time, a growing number of contractors had started working through their own limited liability companies because it was more tax-efficient.
However, the government believed that many contractors weren’t genuinely self-employed, but rather hid behind a corporate structure to pay less tax.
Enter IR35.
The press release put it this way:
“It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged ‘consultant’ paying substantially reduced tax and national insurance.
“The Government is going to bring forward legislation to tackle this sort of avoidance.”
Who does IR35 apply to?
IR35 may apply if you provide personal services to clients through an intermediary – typically your own limited company, also known as a personal services company.
If you work via another type of intermediary – an umbrella company – then IR35 doesn’t apply, as you are already taxed as an ’employee’ of the umbrella company.
Is your contract work caught by the IR35 rules?
How do you know if your work is caught by IR35? The key thing here is to look at the overall picture – both the wording of your contracts, plus your ‘working practices’ (the way you carry out your contract work in reality).
Over the years, HMRC has developed four broad tests of employment. These are:
Which tasks go on your to-do list? And can your client change the scope unilaterally without having to tweak the agreement?
Each task’s order of priority and how you actually do the work?
If it’s you, you’re probably outside IR35. But if it’s the client, you’re probably an ’employee’ in HMRC’s eyes and within IR35.
Can you send a substitute?
You don’t need to prove you’ve actually sent someone to do the work in your place to pass this test.
However, you must be able to demonstrate that it’s a genuine right. In other words, the client shouldn’t be able to refuse your substitute except on reasonable grounds, such as them being unfit for the job or not having the correct security clearance.
The client mustn’t have interviewed the substitute
You mustn’t have picked the substitute from a pool the client has pre-approved
The substitute must do the same work you’d have done
You must have sent the substitute because you didn’t want to do the work yourself
Is there mutuality of obligation?
Mutuality of obligation means the client is contractually bound to give you work, and you’re contractually bound to accept it, irrespective of what it involves.
The courts have held that mutuality of obligation can arise simply if you keep renewing the same agreement every time it expires.
What’s your relationship with the client like?
The practical arrangements you have in place with your client may tip you into IR35’s orbit. In particular, there’s a good chance you’re in scope if:
The client provides the equipment you need to do the work
They’re your only client, or you need permission to sign up another one
You’re embedded into the organisation. Factors that point to this include attending staff meetings, having a profile on their website’s ‘Meet the Team’ section, and getting the same perks as employees
Who makes the IR35 assessment?
When IR35 first came into force, you, the contractor, were responsible for deciding if you were within or outside it.
This changed in April 2017 (for public sector contractors) and changed again in April 2021 (for private sector contractors).
How did IR35 change in 2017?
In April 2017, the government issued new Off-Payroll Working Rules for the Public Sector. This shifted the responsibility for IR35 assessments in the public sector from contractors to public authorities.
“...an entirely different species of employment law and the depth of knowledge required to navigate it successfully exceeds both what is understood by professionals and what is conveyed through the assurance process.”
The upshot is that many public authorities made blanket assessments, applying IR35 even when contractors were genuinely self-employed. This increased costs, cut into contractors’ and intermediaries’ profits, and caused significant disruption.
Andrew Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), put it this way: “The changes to IR35 have damaged the ability of public sector organisations to attract the talent they need and deliver projects on time.”
The new IR35 changes: what happened in April 2021?
Despite the unpopularity of the public sector changes, the government has decided to change the way IR35 status is assessed in the private sector too.
The government initially intended to bring in these reforms in April 2020. But, as part of the stimulus package to help businesses weather the COVID-19 crisis, the reforms were postponed by a year.
So what changed in April 2021?
As in the public sector, it is now the client’s responsibility to assess your IR35 status, unless they qualify as a small company. A company is classed as small if it meets at least two of the following three conditions:
Has 50 employees or fewer
Annual turnover of no more than £15 million
Balance sheet total of no more than £7.5 million
These higher thresholds came into effect from 6 April 2025. To qualify as small, the company must meet two of the three conditions for two consecutive financial years. If the exemption applies, the original IR35 rules (Chapter 8) continue to operate, and you as the contractor are responsible for making the decision and carrying the risk.
Needless to say, these reforms have been as unpopular as the public sector reforms.
How would being within IR35 affect me?
IR35 can affect you in two ways:
You’ll pay more tax
If you’re responsible for assessing your IR35 status and HMRC finds your assessment was wrong, you’ll get fined.
Working within IR35 is less tax efficient
Although the exact figures depend on your tax code, expenses, pension contributions, and other personal circumstances, most independent calculators show that a contractor working through a limited company will typically keep around 66% of their gross income after paying both company and personal taxes.
This assumes they are operating outside IR35 and using a standard low-salary, high-dividend structure.
By contrast, an umbrella company contractor – effectively taxed as an employee, with employer NICs and the umbrella’s margin deducted before their gross pay is calculated – might take home closer to 59%.
These percentages are based on industry averages for a £400/day contract and are intended as a general guide rather than an exact projection.
Overall, if you compare the leading online calculators, an outside-IR35 limited company contractor might be taking home 12% more after tax than an umbrella employee who earns the same contract rate.
IR35 fines
If you’re responsible for assessing your IR35 status and you get it wrong, you’re on the hook for:
30% of your unpaid taxes if the mistake was due to negligence or carelessness.
70% if you knowingly made the wrong assessment.
100% if you tried to hide your real IR35 status.
How can I make sure my contracts fall outside IR35?
While the Off-Payroll reforms mean that in most cases the client is responsible for deciding your IR35 status, you should still take steps to protect yourself.
If you are working for a small company, the original IR35 rules (Chapter 8) still apply, and you are the one making the assessment. In these cases, HMRC can pursue you if they think you’ve got it wrong.
If you are working for a medium or large client (Chapter 10), then the client is responsible for making the IR35 decision and carries the liability if it is incorrect.
Even so, you may still want protection, because HMRC can look at historic contracts from when you were responsible, and you may still face an enquiry about your working practices.
Here are five things you can do.
1. Take out tax investigation cover
If you have contracts that fall under the old IR35 rules (because you are working for a small client), tax investigation insurance is essential.
This will cover the professional representation costs you might incur during an HMRC investigation. Cover is inexpensive – Qdos, for example, offers up to £50,000 of protection for under £100 per year.
If you are working for medium- or large-sized clients, the liability typically sits with the client; however, tax investigation insurance may still be worthwhile to cover enquiry costs or older contracts where you made the determination yourself.
2. Document your working relationship
If you believe you should be outside IR35, the best thing you can do is build a strong case to support this.
Do you have control over your work, set your own hours, and provide your own equipment?
Do you have the right to send a replacement worker?
And is the client obligated to provide you with work (and you to accept it)? Your answers to these questions can prove you’re outside IR35.
It’s also worth gathering additional evidence that supports your position. This could include:
3. Discuss your situation with your client or recruitment agency
Accurate IR35 assessments benefit everyone.
Placing you outside IR35 when you shouldn’t be could expose your client or recruiter to fines. But putting you inside IR35 unnecessarily means the client has a less flexible workforce and higher costs, while the agency makes less profit.
With this in mind, it’s worth having a frank and open conversation. Show your client or recruiter the evidence you’ve collected and explain why getting the assessment right is better than a blanket decision.
It may be useful to band with other contractors and approach the client or recruiter together. There’s strength in numbers.
Confirms all the parties — client, recruiter, intermediary, and you — agree to your IR35 status
This is useful to have, no matter who’s responsible for the IR35 assessment. It shows HMRC you’ve taken steps to comply, and also explains the reasoning.
5. IR35-proof your contract
Your contract is the foundation of your relationship with your client, so it’s worth having a professional contract review specialist look at the wording.
In very simplistic terms, here are four clauses worth including:
An independent contractor clause that states you reserve the right to decide how, when, and where you work, and which specific tasks are within your agreement’s scope
A right of substitution. It’s worth exercising this on occasion and keeping proof, such as email trails
Boundaries. This includes working from your own premises wherever possible, and turning down any employee benefits
A non-exclusivity clause. This makes it clear that you can work on other projects without seeking the client’s permission
More to the point, you could have the most airtight contract in the world, but HMRC can have it set aside if your practical arrangements point towards you being an employee.
With this in mind, it’s critical that your contract accurately reflects your working practices.
You can find out more about IR35 contract wording and download some sample IR35 contracts here.
Status Determination Statements (SDS)
Under the Off-Payroll rules, medium and large clients must take reasonable care when deciding your status and issue a written Status Determination Statement (SDS). The SDS should:
State whether the engagement is inside or outside IR35
Explain the main reasons for the decision
Be passed to you and the next party in the supply chain (often the agency)
If you disagree with the outcome, a client-led disagreement process is available. You should respond in writing, set out why you believe the SDS is wrong, and reference working practices and contract terms.
The client must consider your representations and reply within a reasonable timeframe, typically 45 days, either upholding or changing the decision. Keep copies of the SDS, your response, and the client’s reply.
Inside on one contract, outside on another
IR35 applies engagement by engagement. As a result, you may be ‘inside’ one contract and ‘outside another.
Here are some practical points:
You can run a limited company for outside IR35 contracts and use an umbrella for inside IR35 roles. Keep the paperwork and invoicing separate for each engagement. Some accountants offer a ‘flex’ service, allowing you to switch between limited and umbrella assignments with ease.
If you take an inside IR35 role via your company, factor in deemed employment payments, payroll, and the additional admin. Many contractors prefer to use an umbrella for inside roles, as the administrative burden is much lower.
Maintain clear evidence of working practices for each engagement. The status of one contract does not determine the status of another.
Is a limited company still worth it if you are often inside IR35?
It depends on market conditions and how frequently you secure outside roles.
If most work is inside: operating via an umbrella may be simpler and cheaper. You avoid running deemed payments through your company and reduce admin.
If you regularly secure outside contracts: a limited company still offers flexibility and potential tax efficiency for those engagements.
Keeping your company dormant: if you expect outside IR35 work in the future, you can keep your company open but dormant between engagements. This preserves continuity without closing and re-incorporating.
Consider the total costs, including accountancy fees, insurance, and your time. Talk to your accountant before you take any action – some accountants offer a reduced rate if you’re not contracting via your company for a period of time, but want to keep it live.
Who carries liability under Off-Payroll?
For medium- and large-sized clients, the client typically makes the decision and usually bears the tax liability if it is incorrect.
Liability can move to the fee-payer (often the agency), depending on the supply chain and who pays your company. Where the small companies exemption applies, you make the decision and carry the risk under the original rules.
Quick check: which regime applies to you?
The client is small (meets the exemption); therefore, Chapter 8 applies. You decide, you carry risk. Contract reviews and tax investigation insurance are relevant.
The client is medium or large: Chapter 10 applies. The client decides, issues an SDS, and carries liability if reasonable care is not met. You still need to evidence your working practices and can challenge decisions.
IR35 and Off-Payroll in law
As you will have seen, the term ‘IR35’ is used to refer to two pieces of legislation – both the original 2000 Intermediaries Legislation, plus the new ‘Off Payroll’ rules – which were applied to the public sector in 2017, and to the private sector in April 2021.
The original legislation is included in Chapter 8 of the ITEPA – Income Tax (Earnings and Pensions) Act 2003.
The Off-Payroll changes are included in Chapter 10.
Bringing it together
Since the 2021 reforms, most contractors fall under the Off-Payroll rules.
Check which regime applies. Small clients mean you – the contractor – decide your employment status (Chapter 8). Medium and large clients have this responsibility and must issue an SDS (Chapter 10).
Keep evidence of how you actually work. The wording of contracts matters, but working practices must match the contract terms.
If you are responsible under Chapter 8, a specialist contract review and tax investigation cover is a worthy investment.
Protect yourself against an HMRC IR35 investigation
Award-winning Qdos IR35 insurance – from just £99 per year. Covers £50,000 of legal costs + outstanding tax liabilities if you opt for TLC35. Contract review service also available.
