If you’re a contractor working through a limited company in the UK, understanding IR35 is essential. IR35 advice affect how you’re taxed and whether HMRC considers you genuinely self-employed or effectively an employee.

This guide explains IR35, who it applies to, and how contractors can stay compliant.

What Is IR35?

IR35 is UK tax legislation designed to prevent disguised employment. It applies when a contractor provides services through an intermediary (usually a limited company) but works in a way similar to an employee.

If a contract is deemed inside IR35, the contractor must pay Income Tax and National Insurance Contributions (NICs) broadly similar to those paid by employees.

Who Does IR35 Apply To?

IR35 applies to:

• Contractors working through personal service companies (PSCs)
• Freelancers using intermediaries
• Contractors in the public sector
• Contractors working with medium and large private sector organizations

Small Private Sector Clients

Small private companies (as defined by HMRC) are exempt from making IR35 determinations. A company is regarded as “small” when it satisfies two or more of the following conditions:

• Turnover of £10.2 million or less
• Balance sheet total of £5.1 million or less
• 50 employees or fewer

In these cases, the contractor remains responsible for assessing their own IR35 status.

Inside IR35 vs Outside IR35

Inside IR35

• Treated as an employee for tax purposes (not employment rights)
• Income Tax and NICs deducted at source by the fee payer
• Most business expense claims are restricted
  (Some expenses, such as pension contributions and professional fees, may still be allowable)
• Lower take-home pay compared to outside IR35

Outside IR35

• Genuinely self-employed for tax purposes
• Paid via limited company
• Can pay yourself using salary and dividends
• Greater tax efficiency and flexibility

Who Decides Your IR35 Status?

• Public sector & medium/large private sector: The client must assess IR35 status and issue a Status Determination Statement (SDS).
• Small private sector clients: The contractor decides their own IR35 status.

The SDS must explain the decision and be shared with the contractor and fee payer.

Key Factors HMRC Uses to Assess IR35

HMRC considers real day-to-day working arrangements, not only the written contract.

1. Control

Who decides how, when, and where the work is carried out?

2. Right of Substitution

Can you send a qualified substitute, and has this right been exercised in practice?

3. Mutuality of Obligation (MOO)

While HMRC assumes basic MOO exists in most contracts, higher levels of obligation similar to employment increase IR35 risk.

4. Financial Risk

Do you bear financial risk, such as correcting mistakes at your own cost?

5. Integration

Are you treated as part of the client’s internal workforce?

Common IR35 Mistakes Contractors Make

• Relying only on contract wording
• Ignoring day-to-day working practices
• Assuming certain roles are “automatically inside IR35”
• Using online IR35 tools without professional review
• Not challenging incorrect IR35 decisions

There is no role that is automatically inside IR35 status depends on the individual engagement.

How Contractors Can Protect Themselves

Review Contracts Professionally

An IR35 contract review can identify risks and improvements.

Align Working Practices

Ensure your real working arrangements match the contract.

Keep Evidence

Retain contracts, invoices, emails, and proof of independence.

Challenge Incorrect Decisions

Contractors have the right to formally challenge an IR35 status determination.

Seek Expert IR35 Advice

Professional tax advice helps ensure compliance while maximising take-home pay.

What Happens If IR35 Is Applied Incorrectly?

If HMRC challenges your IR35 status, you could face:

• Backdated tax and NICs
• Interest charges
• Financial penalties
• Lengthy HMRC investigations

Early advice can significantly reduce these risks.

Why Professional IR35 Advice Matters

IR35 legislation is complex and continues to evolve. Specialist advice can:

• Review contracts and working practices
• Support outside IR35 positions where appropriate
• Ensure correct tax treatment for inside IR35 engagements
• Assist during HMRC enquiries or disputes

Final Thoughts

IR35 does not have to be confusing. With the right advice, contractors can remain compliant, protect their income, and avoid costly mistakes.

If you’re unsure about your IR35 status, it’s always better to check early rather than deal with penalties later.