IR35 is HMRC's off-payroll working legislation, also known as the intermediaries legislation, within UK tax legislation. Originally named after an Inland Revenue press release, it is designed to tackle tax avoidance where contractors provide services through an intermediary, usually a personal service company, but work in practice like employees. If HMRC determines that your engagement falls inside IR35, the fee-payer (your agency or end client) must deduct Income Tax and National Insurance from your fees as if you were employed.
Quick answers
- Inside vs outside IR35: These rules commonly affect contractors using their own limited company.
- Who decides IR35 status: Responsibility for making the status determination changed significantly in 2017 and 2021:
- The key tests used to determine IR35 status: HMRC and the courts apply several tests to determine employment status, and responsibility for this changed significantly in 2017 and 2021.
- The financial impact of being inside IR35: If you are inside IR35 and operate through a limited company, you pay tax much like an employee.
For UK contractors working through personal service companies, freelance professionals, limited company directors, and anyone dealing with HMRC's IR35 rules, the key issue is status. This guide explains what IR35 is, who it applies to, how status is assessed, the main tests HMRC uses, including substitution, mutuality of obligation, and control, the financial impact of being inside IR35, and how HMRC's CEST tool fits into the process.
High stakes
An incorrect IR35 determination can result in a tax bill covering multiple years, including back-taxes, interest, and penalties. Getting this right matters enormously.
What is IR35?
IR35 (named after an Inland Revenue press release) is UK tax legislation and the off-payroll working rules, also known as the intermediaries legislation, introduced in April 2000 through the Finance Act to tackle tax avoidance by identifying disguised employees where workers supply services through a personal service company (PSC) and avoid the associated tax, even though they are, in reality, working as an employee of the client. The rules require that tax be collected as if the worker were directly employed, even though a company structure sits in the middle.
Who does IR35 apply to?
IR35 applies to you if:
You provide services through a personal service company (PSC), your own limited company, or another intermediary company
You work for an end client through a limited company arrangement rather than being directly engaged by them
The nature of the engagement would amount to an employment relationship if the intermediary were removed, rather than genuinely self employed work
If you operate through an umbrella company, IR35 does not apply in the same way because you are already treated as an employee of the umbrella, and it does not apply to sole traders in the same way either.
Inside vs outside IR35
| Status | What it means | Tax treatment |
|---|---|---|
| Outside IR35 | You provide services through a personal service company, limited company, or similar intermediary company and are genuinely self employed, operating on your own account with working practices that show independence, such as multiple clients | Under the tax rules and off payroll rules, for tax purposes you are treated as one of the self employed contractors, so your own company receives the fees paid, you pay Corporation Tax, then take salary and dividends and pay tax accordingly rather than having employee-style tax deductions, national insurance contributions, or social security contributions taken first |
| Inside IR35 | IR35 and the payroll working rules apply where, if the intermediary were removed, the engagement would look like an employment relationship, so contractors working in this way are taxed on broadly the same tax basis as staff rather than as off-payroll workers running a business | The fee-payer must deduct PAYE to secure the correct income tax, so you pay income tax and NICs before payment; this can reduce take-home pay, but it does not by itself give employee benefits, employment benefits, or sick pay, and only a 5% administration allowance applies |
These rules commonly affect contractors using their own limited company.
If you work through an umbrella company, PAYE is usually handled by the umbrella instead.
IR35 does not generally apply to sole traders, although employment-status questions can still arise for people treated as self employed.
Who decides IR35 status?
Responsibility for making the status determination changed significantly in 2017 and 2021:
Public sector (from April 2017): The end client (the public authority) is responsible for determining status and the fee-payer deducts tax accordingly.
Medium and large private sector (from April 2021): The April 2021 reforms shifted responsibility to private sector businesses engaging contractors. The end client must issue a Status Determination Statement (SDS), take reasonable care to determine employment status, and pass that decision through the supply chain where agencies or intermediaries are involved.
Small private sector clients: A qualifying small business is exempt from the off-payroll rules, so the contractor remains responsible for their own determination. If the client is not exempt, it must assess the worker's employment status for tax purposes, often using HMRC’s CEST tool on the UK government website, though complex cases may still need professional advice.
Disputes and liability: If a contractor challenges the SDS, the client has 45 days to respond. If it fails to do so, the client can become the deemed employer and may be responsible for PAYE and National Insurance due to HMRC.
The key tests used to determine IR35 status
HMRC and the courts apply several tests to determine employment status, and responsibility for this changed significantly in 2017 and 2021. No single factor is decisive; the overall picture matters.
Substitution: Can you send a substitute to do the work? A genuine right of substitution (with evidence it has been exercised or is genuinely available) points strongly outside IR35 and suggests you are genuinely self-employed.
Mutuality of obligation (MOO): Is the client obliged to offer work and are you obliged to accept it? An obligation on both sides is an indicator of an employment relationship.
Control: Does the client control how, when, and where you work? High levels of control point towards employment, and HMRC will look at actual working practices as well as the contract.
Financial risk: Do you bear financial risk, such as correcting faulty work at your own cost? Taking real risk on your own account can support being self employed for tax purposes.
Part and parcel of the organisation: Do you appear as a regular employee (staff directory, regular desk, invited to company events)? Being separate from the business, including having multiple clients, helps show you are not part of the organisation.
The Status Determination Statement may need to pass through the supply chain to the fee-payer.
If a contractor challenges the decision, the client must respond within 45 days.
If the client does not meet its obligations, it can become the deemed employer.
The proposed repeal of the IR35 reforms in 2022 was reversed in October.
In September 2026, Conservatives pledged to replace IR35 outright.
The financial impact of being inside IR35
If you are inside IR35 and operate through a limited company, you pay tax much like an employee. Under the deemed payment calculation, the fees paid are treated as employment income, so the fee-payer must deduct income tax, account for national insurance contributions and the apprenticeship levy, and ensure the correct income tax is paid to HMRC; if required, the deemed employer carries those liabilities. This is aimed at self-employed contractors who work through their own company rather than being taxed as employees, and the rules also cover the NIC side through social security contributions regulations. You can retain only a 5% allowance for company running costs.
In practice, an inside IR35 engagement through a PSC typically results in a take-home pay broadly equivalent to being directly employed, but with the added overhead of running a company.
CEST: HMRC's status tool
HMRC provides a free online tool on the UK Government website called Check Employment Status for Tax (CEST) to help businesses and contractors assess a worker’s employment status for tax purposes and get a status determination they can use as evidence. CEST is not perfect (it has been criticised for failing to properly assess MOO) but its determinations are binding on HMRC if you answer honestly. Use it as one input among several, not as the definitive answer.
Disclaimer
This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our