The Ultimate Guide
to IR35

Permanent employees and contractors are treated differently under UK law. If a contractor provides services through their own limited company, they may take some of their pay in dividends instead of taxable salary. They can also offset several business expenses against Corporation Tax and pay less in National Insurance Contributions. This lower tax burden reflects the more significant financial risk of being self-employed.
HMRC introduced IR35 (or the ‘off-payroll working rules’) in 2000 to tackle ‘disguised’ employment. When a contractor is a ‘disguised’ employee, they take advantage of the tax efficiency of working through a limited company despite being treated and working as though they are an employee by the end client.

• Lorem ipsum dolor sit amet consectetur. Tristique at maecenas eros enim viverra faucibus consequat vel.
• Facilisis eget egestas volutpat rhoncus sed malesuada egestas aliquet id.
• Lorem ipsum dolor sit amet consectetur. Aenean quam tortor nulla condimentum quis.
• Faucibus nulla nisi viverra arcu volutpat aenean pharetra. Egestas bibendum volutpat ac.
• Lorem ipsum dolor sit amet consectetur. Convallis arcu non praesent tortor netus.
• Suspendisse aenean lectus etiam urna urna tincidunt et proin neque. Aliquam vestibulum.

‘IR35’ was the reference given to the press release which first announced the off-payroll working rules, it was the Inland Revenue’s (IR) 35th (35) press release. IR35 is used to determine whether a contract points towards employment or self-employment, combating tax avoidance by closing loopholes and ensuring contractors working the same way as permanent employees pay the same taxes.

Lorem ipsum dolor sit amet consectetur.

‘IR35’ was the reference given to the press release which first announced the off-payroll working rules, it was the Inland Revenue’s (IR) 35th (35) press release. IR35 is used to determine whether a contract points towards employment or self-employment, combating tax avoidance by closing loopholes and ensuring contractors working the same way as permanent employees pay the same taxes.



If a contract is ‘Inside IR35’, it points towards employment. The working arrangements are similar to those of a permanent employee, so HMRC imposes broadly the same Income Tax and National Insurance liabilities. Working Inside IR35 is usually done via an umbrella company that handles the administrative burden of paying the correct taxes.

If a contract is ‘Outside IR35’, it points towards self-employment, and you can enjoy the tax efficiency that self-employment brings (as well as all the associated risks). Working Outside IR35 is usually done via a personal service company (‘PSC’). A PSC is a limited company set up by a contractor to provide their services; they are usually the sole shareholder and company director.

IR35 applies on a contract-by-contract basis; it does not apply once to your entire company. For each contract, the relevant ‘decision-maker’ (usually the end client) prepares a Status Determination Assessment (‘SDS’). The SDS looks at the engagement contract’s wording and the contractor’s day-to-day working practices and decides whether IR35 applies.

Three key factors are considered when assessing a contractor’s IR35 status:

1. Supervision, Direction and Control
   Does the contractor maintain autonomy over what work must be done, when it has to be done, and where it has to be done? If not, this points to an employee-employer relationship.

   Once the client pays the invoice, the umbrella company deducts Income Tax, National Insurance, and employer costs (employer’s National Insurance, apprenticeship levy, and umbrella margin). The net amount is then paid directly into the contractor’s personal bank account.

2. Substitution
   Does the contractor have the right to provide a qualified replacement in their place should they be absent for any reason? If not, this is an indicator that the contract is Inside IR35
3. Mutuality of Obligations
   Mutuality of obligations exists when an employer has a legal duty to provide work, and the employee has a legal duty to perform said work. It is a vital part of a traditional employee/employer relationship.

Understanding IR35 and whether you fall inside or outside can be a challenge. Much information surrounds the legislation, its technicalities and how it could impact you as a contractor. Our comprehensive guide covers all you need to know. We’ll answer all of the frequently asked questions, such as “What is IR35?” and “How does IR35 work?” as well as look at the difference between inside IR35 and outside IR35 and how status is determined.
IR35’s nuances mean contractors can’t be expected to know the law inside out. Please only use this article as a guide. If in doubt, refer to HMRC’s website or seek professional advice.
Understanding IR35 and whether you fall inside or outside can be a challenge. Much information surrounds the legislation, its technicalities and how it could impact you as a contractor. Our comprehensive guide covers all you need to know.

Working Inside IR35 means that you have been caught by the IR35 rules, and HMRC regards the service you provide to be one of employment. You are considered an employee for tax purposes rather than a self-employed individual running their own business.
If you work Inside IR35, you are subject to the same Income Tax and National Insurance Contributions as a permanent employee. You cannot make use of the salary and dividend structure in the same way you can while working Outside IR35 via a limited company. Instead, you are paid via PAYE. Paying a contractor via PAYE requires a fee-payer to run payroll. Most clients do not want to take contractors onto their payroll directly; instead, they prefer to engage contractors via an intermediary such as an umbrella company.
If you are a permanent employee considering contracting for the first time, accepting an Inside IR35 contract is more straightforward than working Outside IR35 via a limited company. You do not need to incorporate a limited company, hire an accountant, or submit a self-assessment tax return. Once you have chosen an umbrella company, all you need to do is submit your timesheets. The umbrella company will handle the administrative tasks of running payroll and paying the relevant taxes to HMRC.
The situation is more complicated if you are an existing contractor considering switching from working Outside IR35 to working Inside IR35, as you need to decide what to do with your limited company. Do you keep it going, make it dormant, or close it completely?

Once a project is found to be Inside IR35, an intermediary must be chosen. Although umbrella companies are by far the most common trading solution, they are not the only option available to contractors: