What is IR35?
IR35 refers to off-payroll working rules that determine whether a contractor working through a limited company should be treated as an employee for tax purposes. If your contract is deemed inside IR35, you pay income tax and National Insurance as if you were employed, significantly reducing your take-home pay compared to outside IR35 arrangements.
What are the key IR35 tests?
HMRC assesses three primary factors: substitution, meaning whether you can send someone else to do the work; control, meaning whether the client directs how you work; and mutuality of obligation, meaning whether both parties are obliged to offer and accept work. A genuine right of substitution, low control, and no mutuality of obligation are strong indicators of outside IR35 status.
Who determines IR35 status?
For private sector engagements, the end client, meaning the organisation using your services, is responsible for determining IR35 status if they have more than 50 employees and £10.2m turnover. Small clients can still ask contractors to self-determine. The determination must be provided in a Status Determination Statement.
What happens if I get it wrong?
If HMRC determines your contract was inside IR35 but you treated it as outside, you can face back taxes, interest, and penalties. Since 2021, the liability falls on the client or fee-payer, often an agency, rather than the contractor in most cases, but this depends on the specific circumstances.