When people talk about “IR35”, they are usually referring to two linked sets of rules.
The original Intermediaries Legislation and the later Off-Payroll rules use the same employment status tests, but place responsibility for applying them on different parties.
This guide focuses on the core IR35 framework and the status tests that sit behind both sets of rules.
Chapter 8 and Chapter 10
The original IR35 legislation sits in Chapter 8 of ITEPA 2003. It applies where contractors are responsible for assessing their own IR35 position, including engagements with small private-sector clients.
The later rules in Chapter 10 shift that responsibility to medium and large clients. The client must decide whether IR35 applies and ensure PAYE is operated where it does.
If your client is medium or large and you want to understand how this responsibility shift works in practice, read our separate guide to the Off-Payroll rules.
You can also use our IR35 Responsibility Checker to work out whether the contractor’s company or the client is responsible for the IR35 decision and who may have to deduct PAYE and National Insurance.
Why IR35 was introduced
The notorious IR35 legislation takes its name from a 1999 Inland Revenue press release, ‘Countering Avoidance in the Provision of Personal Services’.
Its aim was to prevent individuals from leaving permanent jobs only to continue working in a similar way through limited companies, known as intermediaries, to reduce their tax bills.
Contractors working through limited companies do not pay National Insurance Contributions on dividend income. By taking a modest salary and the remainder as dividends, a contractor could significantly reduce the overall National Insurance liability.
The IR35 rules became law through Schedule 12 of the Finance Act 2000.
The provisions were later consolidated into Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which is where the original IR35 rules now sit.
You can read more about how the legislation developed in our IR35 timeline.
The fundamentals behind the IR35 rules
IR35 was introduced to clamp down on the widespread use of personal service companies by individuals who would otherwise have been classed as employees if they had provided their services directly to the client.
Employees pay NICs on their salaries, and employers’ NICs are also payable. If a limited company contractor takes a modest salary and the remainder of their income as dividends, there may be little or no National Insurance liability at all.
To work out if an individual’s contract is subject to IR35 or not, a complex series of employment status rules is used to determine whether a person would be ‘employed’ or ‘self-employed’ for tax purposes.
You can read more about the implications of your employment status in our guide to IR35 status pointers.
For example, a contractor who works on a client site under the direct supervision of the client, using the client’s equipment and staff facilities, is likely to be deemed ‘employed’ under the self-employment rules.
However, a freelancer who works from home, can provide a substitute if unavailable, and has multiple clients, is far more likely to be deemed ‘self-employed’ and therefore free from the burdens of IR35.
Our guide to proving you have the right to provide a substitute explains this in more depth.
It is important to note that when assessing a contractor’s IR35 status, HMRC will consider their working practices as well as the wording of the contract.
The IR35 rules apply to each engagement, not to the individual.
It may be possible for an individual to work on several contracts during a given period, with only some falling within the IR35 net.
What about the Off-Payroll rules?
The Off-Payroll rules were implemented in the public sector in 2017 and in the private sector in 2021.
These rules are found in Chapter 10 ITEPA 2003, which sits alongside Chapter 8 but shifts responsibility for status decisions to the client rather than the contractor.
If you work for a client that is not classed as a ‘small business’, then the client is now responsible for working out your employment status and issuing you with a Status Determination Statement (SDS).
Before these rules were introduced, contractors were responsible for self-certifying their own IR35 status under Chapter 8.
Small clients continue to fall under the original Chapter 8 rules. Larger clients apply Chapter 10, but in both cases the underlying status tests are the same.
What if you are caught by IR35?
If your contract is caught by IR35 under Chapter 8, you will draw most of your income in the form of a deemed payment.
If your client is a ‘small business’, you can claim a 5 per cent expense allowance to cover the administrative costs of running your company.
Unfortunately, this small concession is only available to a limited number of contractors due to the Off-Payroll rules, which remove the 5 per cent allowance when Chapter 10 applies, and the client is responsible for operating PAYE.
Although you may still be better off contracting via a limited company under IR35, many contractors caught by the rules join umbrella companies for a more hassle-free way to work.
In many cases, clients prefer not to hire limited company contractors due to the complexities of the Off-Payroll rules. In such cases, you may have no choice but to work via an umbrella company.
IR35 contract reviews and investigation insurance
There is a significant difference in take-home pay if your contracts are caught by IR35, so we strongly recommend using an IR35 contract review service before signing a new contract.
Use our IR35 calculator to compare net take-home pay between working via an umbrella (inside IR35) and via your own limited company (outside IR35).
You might also consider taking out IR35 insurance if you are determining your own IR35 status, in case you need professional representation following an HMRC status review.
Next – read our guide to the Off-Payroll rules.
Key IR35 status tests at a glance
IR35 status decisions rarely turn on a single factor. HMRC and the tribunals consider a range of tests and build a picture from them all. The most important include:
- Control – how far the client can direct what you do, and how and when you do it. See our guide on control as an IR35 factor.
- Mutuality of obligation – whether there is an ongoing expectation that work will be offered and accepted. We explain this in mutuality of obligation.
- Personal service and substitution – whether you have to do the work personally or can send a substitute. See our substitution guide.
- Financial risk – whether you carry any real risk of loss or opportunity to profit, covered in financial risk as an IR35 factor.
- Integration – how far you become part and parcel of the client’s organisation, discussed in our part and parcel guide.
- Business on own account – whether you are genuinely running a business in your own right, explained in business on own account (BOOA).
These tests are brought together in our overview of IR35 employment status tests.
Working practices and contract wording
The written contracts are central to an IR35 status assessment, but they are not considered in isolation.
An IR35 case involves three stages: identifying the terms of the actual contractual arrangements, constructing the hypothetical direct contract between the worker and the client, and deciding whether that hypothetical contract would be one of employment.
The actual contracts are interpreted using ordinary contractual principles. A written term cannot simply be disregarded because it was never exercised or because the day-to-day arrangements developed differently.
For example, a genuine contractual right of substitution does not lose its effect merely because the contractor never needed to provide a substitute. However, the wording and scope of the right must still be examined, together with the other contracts in the chain.
Evidence about how the engagement operated may also be relevant. It may help establish oral or implied terms, show that an agreement was varied or provide evidence of the circumstances in which the services were supplied.
HMRC and tribunals may therefore examine who made decisions, what rights of control the client possessed, whether the contractor had to accept additional work and how the contractor interacted with the wider organisation.
This does not mean that working practices automatically override the written contract. The Court of Appeal confirmed in Atholl House that the special approach used in employment-rights cases such as Autoclenz cannot simply be applied in an IR35 tax case.
You can read more about this in our IR35 status tests guide and in our summaries of Ready Mixed Concrete and Hall v Lorimer.
Common client mistakes with IR35 and Off-Payroll
Since the Off-Payroll rules were introduced, many clients have struggled with their newly granted responsibilities.
Some common problems experienced by clients include:
- relying solely on job titles rather than looking at working practices.
- using blanket assessments that treat all contractors as inside IR35.
- placing too much weight on CEST results without understanding its limitations.
- failing to document how an SDS decision was reached.
Under the Off-Payroll rules, clients must take reasonable care when making status decisions.
Read more in our guide to Status Determination Statements and client responsibilities.
There is also limited appetite in some organisations to engage limited company contractors at all, which means many contractors now have to use umbrella providers as a term of engagement.
You can see the practical effect of some of these decisions in our IR35 news section.
How CEST fits into status decisions
Many clients and agencies rely on HMRC’s Check Employment Status for Tax (CEST) tool as part of their status determination process. CEST can be a useful starting point, but it has some well-publicised limitations.
The tool assumes that mutuality of obligation exists wherever there is a contract for work. It also cannot capture every detail of working practices or the longer-term pattern of someone’s business activities.
This is one reason some cases that pass CEST still result in disputes.
We look at CEST and other tools in more detail in our IR35 tools and resources guide.
What contractors should document
Contractors who want to support an outside IR35 position should think carefully about the evidence they keep.
Useful items might include:
- clear statements of work and deliverables for each engagement
- emails showing how you control your method of working or negotiate changes
- records of when you have turned down work or proposed a variation
- evidence of multiple clients over time, or clear marketing of your services
- proof of business overheads, such as insurance, software, equipment and training
This evidence can help demonstrate that you are in business on your own account, rather than working as a ‘disguised employee’.
For more in-depth reading, try our guides to financial risk and BOOA.
Relevant IR35 case law
Although IR35 is now enshrined in statute, case law continues to play a defining role in status disputes.
Decisions such as Ready Mixed Concrete, Hall v Lorimer, HMRC v Professional Game Match Officials Ltd (PGMOL) and HMRC v Atholl House Productions Ltd have all helped shape how the status tests are applied.
These cases are regularly cited by tax advisers and employment lawyers, and they underpin much of what HMRC says in its Employment Status Manual. Most contractors will never end up anywhere near a tribunal, but the thinking in these decisions still shapes how IR35 status is judged in practice.
Next, read our accompanying guide to the Off-Payroll Rules.