IR35 Explained: What Every UK Contractor Needs to Know

Q: Can I appeal an IR35 determination?

Yes. You can raise a dispute with the client, who must respond within 45 days. Unresolved cases can go to the tax tribunal.

Q: Does IR35 apply to all my contracts?

IR35 is assessed per contract. You could be inside IR35 for one client and outside for another simultaneously.

Q: What happens if HMRC investigates me?

HMRC can go back several years. If found inside IR35, you owe unpaid tax plus interest and potential penalties — often tens of thousands of pounds.

What Is IR35?

IR35 (officially the "off-payroll working rules") is UK tax legislation designed to ensure contractors who work like employees pay similar taxes to employees, even if they operate through a limited company.

The name comes from the Inland Revenue press release number 35, published in 1999 when the rules were first announced. They've been significantly reformed since then — most recently in 2021 when responsibility for determining IR35 status shifted from contractors to medium and large businesses.

Who Does IR35 Affect?

IR35 affects contractors who:

Work through their own limited company (Personal Service Company, or PSC)
Provide services to a client
Would be considered an employee if the limited company didn't exist

If you're a sole trader, IR35 doesn't apply to you — you're already taxed as an individual.

Inside vs Outside IR35: What's the Difference?

Outside IR35 — you're genuinely self-employed. You can pay yourself a combination of salary and dividends, keeping your tax bill lower.

Inside IR35 — HMRC considers you to be a "disguised employee." The fee-payer (client or agency) must deduct Income Tax and National Insurance before paying you, similar to PAYE. You effectively pay employee taxes without receiving employee benefits.

Being inside IR35 typically costs a contractor an additional 20–25% in tax.

How Is IR35 Status Determined?

There's no single test. HMRC considers the overall picture of the working arrangement. The three main factors are:

Control — Does the client control how, when, and where you work? High control = more likely inside IR35.
Substitution — Can you send someone else to do the work? If yes, this points toward outside IR35.
Mutuality of obligation — Is the client obligated to offer you work, and are you obligated to accept it? If yes, points toward inside IR35.

Other factors include financial risk (do you have business costs, equipment?), part and parcel of the organisation (do you appear on org charts, attend company socials?), and exclusivity (do you work for multiple clients?).

Who Decides Your Status?

Since April 2021:

Small businesses (under 50 employees, under £10.2m turnover) — the contractor decides their own status
Medium and large businesses — the client decides and issues a Status Determination Statement (SDS)
Public sector — the client decides (this rule has applied since 2017)

How to Protect Yourself

Get a contract review — have an IR35 specialist review your contract before signing
Use HMRC's CEST tool — Check Employment Status for Tax, though it's not always conclusive
Working practices matter as much as contracts — if your day-to-day working life looks like employment, the contract won't save you
Consider IR35 insurance — specialist policies cover investigation costs and backdated tax bills

FAQ

Can I appeal an IR35 determination?

Yes. If you disagree with a client's Status Determination Statement, you can raise a dispute with the client. They must respond within 45 days. If still unresolved, you can challenge HMRC's position through the tax tribunal system.

Does IR35 apply to all contracts?

IR35 is assessed on a contract-by-contract basis. You could be inside IR35 for one client and outside for another simultaneously — your overall tax status depends on each individual engagement.

What happens if HMRC investigates me?

HMRC can investigate historic contracts going back several years. If found inside IR35, you'll owe unpaid Income Tax and National Insurance plus interest and potentially penalties. This can run to tens of thousands of pounds, which is why IR35 insurance is worth considering.

Is working inside IR35 always bad?

Not necessarily. Some contractors accept inside-IR35 roles for the right day rate, stable long-term work, or to build specific experience. The key is knowing the true financial impact — typically £10,000–£30,000 more in tax per year depending on earnings.

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