What IR35 means and how HMRC decides
IR35 (officially the Intermediaries Legislation) was introduced in 2000 to tackle what HMRC called "disguised employment", where an individual effectively works as an employee but structures their income through a limited company to pay less tax and NI. The legislation says that if, ignoring the company, the worker would be an employee, they must pay employment taxes on their income from that engagement.
There is no single test for IR35. HMRC and the courts look at the overall picture of the working relationship. However, three factors carry the most weight: control (the dominant test), substitution, and mutuality of obligation. A genuine right to substitute and an absence of mutuality of obligation are the strongest indicators of being outside IR35.
Control
HMRC asks: does the client control not just what work is done, but how it is done? An employee is typically told how to carry out their duties. A genuine contractor delivers an outcome using their own professional expertise and judgement. The more the client dictates the method, the stronger the case for inside IR35.
Substitution
Can you send someone else to do the work? A genuine right of substitution is a powerful outside indicator because it means the contract is for a service, not for your personal attendance. The right must be real and not merely contractual window-dressing, HMRC will look at whether it has ever been exercised or could realistically be.
Mutuality of Obligation
Does the client have an obligation to offer you work, and do you have an obligation to accept it? This is the characteristic that most distinguishes employment from contracting. An employee has an ongoing obligation to turn up; a contractor is engaged for a specific project. If both parties simply move on after the project ends with no expectation of continuation, MOO is absent.
Off-payroll rules (Chapter 10 ITEPA): Since April 2021, medium and large private sector clients are responsible for determining the IR35 status of contractors they engage, not the contractor themselves. If you work for a small company (two of three criteria: under 50 employees, under £10.2m turnover, under £5.1m balance sheet), the old rules still apply and you determine your own status.
Frequently asked questions
If HMRC determines that an engagement is inside IR35, the income from that engagement is treated as a deemed salary. You (or your fee-payer under the off-payroll rules) must pay income tax and National Insurance on the full contract value, minus a 5% allowance for business expenses. You cannot take dividends from the contract income. The financial impact can be severe: a contractor billing £100,000 who should have been inside IR35 could face an additional tax bill of £25,000 to £35,000, plus interest and potentially penalties for earlier years.
No. Your contract is relevant, but HMRC will always look at the actual working practices rather than what the contract says. A contract can include outside IR35 clauses such as a substitution right, but if you never use it and the client would not accept a substitute in practice, HMRC will disregard it. The phrase "contracts are a starting point, not the whole picture" is frequently used in IR35 case law. Your working reality must match your contract terms.
It depends on the size of the client. Since April 2021, medium and large companies in the private sector are responsible for making the status determination and issuing a Status Determination Statement (SDS). If they determine inside IR35, the fee-payer (often a recruitment agency) must deduct income tax and NI from your invoice. If your client is a small company (meeting two of: under 50 employees, turnover under £10.2m, balance sheet under £5.1m), you still determine your own status as under the original rules. Public sector engagements moved to the same model in 2017.
Yes, but there is limited financial benefit. If you are inside IR35 under the off-payroll rules, the fee-payer deducts income tax and employee NI before paying your company. Your company also pays employer NI. The money that reaches your company has already been taxed at employment rates, so taking it as dividends creates a further tax liability. Many contractors in this position choose to use an umbrella company instead, which handles the PAYE processing and is often simpler than operating a limited company with little tax advantage.
Related calculators
Tax Toolkit UK provides free tools for guidance purposes only. The IR35 checker gives an indicative assessment based on the factors you describe. It is not a legal determination. Always seek specialist contractor tax advice for formal IR35 assessment.