IR35 in Practice: A Contractor's Guide to Status, Risk, and Protection

What IR35 actually means

IR35 is the informal name for the off-payroll working rules — a set of HMRC regulations designed to ensure that contractors who work in a manner equivalent to employees pay broadly the same tax and National Insurance as employees, even when they operate through a limited company.

The legislation targets what HMRC describes as "disguised employment" — situations where an individual is, in substance, an employee of their end client but uses a personal service company to receive payment, thereby reducing their tax liability. Where IR35 applies, the income received through the limited company is treated as employment income, subject to PAYE and employee and employer National Insurance.

The off-payroll working rules — who is responsible

Since April 2021, the responsibility for determining IR35 status in the private sector shifted from contractors to end clients, for engagements with medium and large businesses. Small businesses — those meeting two of three criteria: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees — are exempt, leaving the status determination responsibility with the contractor's own limited company.

For engagements with medium and large end clients, the end client must issue a Status Determination Statement before the engagement begins. If the determination is "inside IR35," the fee payer — typically the agency or end client — must deduct PAYE and National Insurance from payments before they reach the contractor's limited company.

The key status tests

HMRC determines IR35 status by examining the working relationship in its totality. Three factors carry the most weight in tribunal decisions: substitution, control, and mutuality of obligation.

Substitution asks whether the contractor has a genuine, unencumbered right to send a substitute to perform the work. A contractual right to substitute that is never exercised and would in practice be refused is unlikely to be accepted as genuine. Control examines the degree to which the end client directs how, when, and where the work is performed. Contractors who work set hours, at a specified location, under direct supervision, using the client's equipment, are more likely to be found inside IR35. Mutuality of obligation considers whether there is an ongoing obligation on the client to offer work and on the contractor to accept it — a hallmark of employment rather than genuine self-employment.

Status Determination Statements

End clients must issue a Status Determination Statement giving their determination — inside or outside IR35 — and the reasons for it. Contractors have the right to disagree with the determination and trigger a client-led disagreement process. The client must respond within 45 days. If they fail to engage with the process properly, the liability for any unpaid tax can pass back to them.

How to protect yourself

Genuine outside-IR35 status requires that the working relationship in practice — not just in the contract — reflects self-employment. Contractors should ensure their contracts reflect genuine substitution rights and are not exclusively personal, avoid working practices that mirror employment, maintain multiple clients where possible to evidence genuine business operation, keep records of business expenses, equipment, and insurance, and obtain professional indemnity insurance in their company name.

Working with a specialist IR35 contract reviewer before signing any engagement and retaining IR35 insurance to cover the cost of an HMRC enquiry and any resulting tax liability are widely considered essential risk management steps for contractors working outside IR35.