IR35 Explained: A Practical Guide for UK Contractors and the Self‑Employed

IR35 can feel confusing, even for seasoned contractors. The rules affect how you’re taxed, how clients pay you, and who decides your status. This guide explains what IR35 is, how “inside” vs “outside” status works, who makes the call, and the steps you can take to stay compliant while protecting your take‑home pay.

What is IR35?

IR35 is officially “the off‑payroll working rules” that HMRC first introduced in 2000 to tackle “disguised employment.” That’s where someone supplies services via an intermediary (usually a limited company, often called a personal service company or PSC) but works like an employee. If HMRC considers you a disguised employee, you’re taxed broadly like an employee for that engagement.

Inside IR35 vs outside IR35: what’s the difference?

Inside IR35

• How tax works: Income Tax and employee National Insurance are deducted at source under PAYE on the fees for that assignment.

• Financial impact: Net take‑home pay is usually lower than operating outside IR35.

• Employment rights: Being “inside” for tax does not automatically grant employment rights (e.g., holiday or sick pay). Those depend on your contract of employment, which most contractors don’t have with the client.

Outside IR35

• How tax works: You operate as a genuine business. You invoice through your limited company, then manage your own taxes (e.g., salary/dividends mix).

• Financial impact: Typically higher take‑home due to tax efficiency and business expense claims.

• Autonomy: You control how, when and where you deliver the services (consistent with a business‑to‑business relationship).

How HMRC decides status:

The three core tests HMRC looks at real‑world working practices, not just what the contract says. Three headline factors matter most:

• Control: Who decides how, when and where the work is done? More client control suggests inside IR35; autonomy suggests outside.

• Substitution: Do you have a genuine, practical right to send a suitably qualified substitute, and can you exercise it? A real right of substitution supports outside IR35.

• Mutuality of obligation (MOO): Is the client obliged to offer continuous work and are you obliged to accept? Ongoing obligation points toward employment; project‑based, no‑obligation work points toward outside IR35.

Other indicators HMRC considers

• Financial risk (e.g., rectifying defects in your own time, fixed‑price deliverables).

• Provision of equipment (yours vs client’s).

• Integration (“part and parcel” of the organisation, line management duties, attending employee appraisals).

• Exclusivity and notice periods.

• Ability to work for multiple clients simultaneously.

Who decides your IR35 status?

• Public sector (from April 2017) and medium/large private sector clients (from April 2021): The client must decide your status and issue a Status Determination Statement (SDS). The “fee‑payer”, often the agency operates PAYE if the role is inside IR35.

• Small private sector clients: If your end client qualifies as a “small” company under the Companies Act 2006, you (the contractor) decide your status and carry the risk if HMRC disagrees.

Tip: Even when you determine your own status, keep an SDS‑style file note with evidence of your working practices.

Using HMRC’s CEST tool HMRC’s Check Employment Status for Tax (CEST) tool asks about control, substitution, MOO and other factors, then provides a determination for that engagement.

• Pros: Free, quick, and HMRC says it will stand by results when the answers reflect actual working practices and the tool is used correctly.

• Limitations: Nuance matters. Marginal cases or evolving working practices may need a professional review.

• Best practice: Use CEST as a starting point, document evidence, and get an expert view where the result is “unable to determine” or feels borderline.

Tax and payroll consequences if you’re inside IR35

• Where the client/agency is the fee‑payer: PAYE is deducted from your assignment income before it reaches you. Employer’s NICs and (if applicable) the Apprenticeship Levy are typically the fee‑payer’s cost on top, but day rates can be renegotiated to reflect this.

• Where you’re the decision‑maker (small client): A “deemed employment payment” calculation applies through your company at year‑end for the inside engagement.

• Expenses: Like an employee, ordinary commuting to the client site isn’t generally tax‑deductible when inside IR35. Keep records of what you can legitimately claim.

How to strengthen an outside IR35 position Contract

• Clear right of substitution the client cannot unreasonably refuse.

• Deliverables, milestones and outcomes, not time and supervision.

• No obligation on the client to offer continuous work or on you to accept it.

• Ability to provide services to other clients concurrently.

• Commercial terms that look like business‑to‑business (own insurance, warranties, responsibility for errors).

Working practices

• Decide how and where work is performed within agreed outcomes.

• Use your own equipment where practical.

• Avoid being managed like staff (rotas, appraisals, company perks).

• Invoice by milestone or project where appropriate.

• Demonstrate business presence (website, insurance, multiple clients).

IR35 insurance: do you need it? What it can cover:

• Professional support and legal defence in an HMRC status enquiry.

• Potential tax, interest and penalties arising from an adverse IR35 decision, subject to policy terms.

When it’s worth considering

• Borderline roles or long, on‑site engagements.

• Where you determine your own status (small client exemption).

• If multiple contractors work across your business and you want portfolio‑level protection.

Summary checklist

• Identify who decides status: Is your client small (you decide) or medium/large (they decide with an SDS)?

• Review your contract: Does it reflect deliverables, substitution and limited client control?

• Align working practices: Make sure day‑to‑day reality matches the contract.

• Use CEST and document evidence: Screenshots, SDS, emails, and a status file note.

• Consider insurance: Especially for borderline or complex cases.

• Get expert advice: A short review can prevent costly disputes later.

How J‑Benn Finance can help IR35 is manageable with the right support:

• Review contracts and working practices for IR35 risk, with practical fixes you can implement quickly.

• Prepare or challenge Status Determination Statements and build a robust evidence file.

• Optimise your pay structure, expenses and VAT position when operating outside IR35.

• Model take‑home pay scenarios (inside vs outside) so you can price engagements confidently.

• Coordinate with reputable IR35 insurance providers and support you through HMRC enquiries.

Have a contract or engagement you want us to sanity‑check?

Book a quick discovery call with J‑Benn Finance and get clear, actionable advice before you sign.