IR35 Explained: Off-Payroll Working Rules

Few pieces of tax legislation cause as much anxiety among contractors and the businesses that hire them as IR35. The acronym is shorthand for rules about whether someone working through their own company is, in reality, an employee in disguise — and getting the answer wrong can be expensive for either side. Yet the underlying principle is straightforward once the jargon is stripped away. This guide explains what IR35 is, what "inside" and "outside" mean, the tests that decide status, and who is now responsible for the decision. This is general information, not tax or legal advice.

What IR35 is

IR35 — formally the "off-payroll working rules" — is UK tax legislation aimed at stopping "disguised employment". It targets situations where a worker provides their services through an intermediary, usually their own limited company (often called a personal service company), but works in a way that looks just like being an employee of the client.

The concern is fairness. A genuine employee pays income tax and National Insurance through PAYE. If someone does essentially the same job but routes their pay through a company, they could pay less tax while the client avoids employer obligations — even though, day to day, the relationship is indistinguishable from employment. IR35 exists to tax those engagements broadly as the employment they resemble.

IR35 is not about whether you have a limited company. It is about whether the working relationship behind a contract looks like employment or like genuine business-to-business work.

Understanding it matters whenever a business uses contractors rather than staff — a choice we explore more fully in contractor versus employee.

Inside vs outside IR35

The whole system turns on a single classification for each engagement:

• Outside IR35 — the contractor is genuinely in business on their own account. The engagement is treated as a true business-to-business arrangement, and the contractor's company is taxed accordingly, typically a more tax-efficient outcome.
• Inside IR35 — the working relationship is, in substance, employment. Income tax and National Insurance are deducted broadly as they would be for an employee, removing most of the tax advantage of working through a company.

Crucially, the label on the contract does not decide this. HMRC looks at the reality of the working arrangement. A contract that says "outside IR35" means nothing if the day-to-day relationship behaves like employment.

The tests that decide status

There is no single rule. Status is judged by weighing several factors drawn from decades of employment case law. Three carry the most weight:

1. Control. How much say does the client have over how, when and where the work is done? A high degree of direction points towards employment; genuine autonomy over your methods points towards self-employment.
2. Personal service and substitution. Must you personally do the work, or could you send a suitably qualified substitute in your place? A genuine, usable right of substitution is a strong indicator of being outside IR35; an obligation to do the work yourself points the other way.
3. Mutuality of obligation. Is the client obliged to offer you work, and are you obliged to accept it? An ongoing expectation of continuous work looks like employment; a project-by-project basis with no such obligation looks like business.

Other factors add colour to the picture:

• Financial risk. Do you risk your own money, fix defects at your own cost, or provide your own equipment? Real financial risk suggests being in business.
• Integration ("part and parcel"). Are you treated like a member of staff — a manager, a fixed desk, a place on the org chart, staff perks? Heavy integration points towards employment.
• Being in business on your own account. Do you have multiple clients, your own branding, insurance and the trappings of a real business?

No single factor is decisive; HMRC and the courts look at the overall picture. GOV.UK provides the Check Employment Status for Tax (CEST) tool to help assess a particular engagement, though it is guidance rather than a guarantee.

Who decides status now

This is where the rules have shifted, and where responsibility — and the tax risk — sits depends on the client:

For engagements with most medium and large private-sector clients and public-sector organisations, the client must assess each contractor's status and issue a Status Determination Statement (SDS) explaining the decision and the reasons for it. The responsibility for accounting for tax then sits within the supply chain rather than solely with the contractor.

Where the client is a small private company, the older position generally still applies: the contractor's own limited company is responsible for deciding its IR35 status. The detailed definitions of "small" and the precise mechanics can change, so always confirm the current rules on GOV.UK.

Why it matters for businesses and contractors

For businesses that engage contractors, getting status determinations right is now a compliance responsibility, not an afterthought. Blanket decisions — treating every contractor as inside IR35 to be safe — can drive away talent and may not reflect each engagement's reality. Sensible practice is to assess each role honestly, document the reasoning, and keep contracts and working practices aligned. This connects to wider questions of how you structure roles and reward, covered in our guides on how to write a job description and registering a UK company.

For contractors, status affects take-home pay and how you run your company. It pays to understand the factors, keep working practices genuinely business-like where you operate outside IR35, and seek specialist advice for important engagements.

Common misconceptions

• "It is decided by my contract." No — the written contract matters, but HMRC weighs the actual working relationship.
• "Having a limited company keeps me outside IR35." No — the company is just the structure; status depends on how you work.
• "One factor settles it." No — status is judged on the whole picture, not a single test.
• "The rules never change." They do — thresholds and responsibilities have shifted before, so check GOV.UK for the current position.

The bottom line

IR35 asks one essential question: behind the contract and the company, does this engagement look like employment or like genuine business-to-business work? "Inside" means it is taxed like a job; "outside" means it is treated as real self-employment. Status hinges on control, personal service and mutuality of obligation, judged on the working reality rather than the paperwork — and for most medium and large clients, it is now the client who must make and document that call. Because the rules are detailed and can change, treat this as a starting point only. This is general information, not tax or legal advice; check GOV.UK and take professional guidance for your situation.