If you’re a contractor working through your own limited company, one of the most important tax rules you need to understand is IR35. Put simply, IR35 determines whether you should be taxed as a self-employed contractor or as a regular employee — and the consequences can significantly impact your take-home pay.
What is IR35?
IR35 are a set of tax rules that were imposed on the contract industry back in April 2000. They are specifically used where a contractor/consultant provides their personal service to another business through an intermediary such as a personal service company.
The rules are designed to determine whether you should be considered employed or self-employed in delivering these services.
If it is determined you are employed (new terminology “off payroll worker rules apply”, old terminology “inside/caught by IR35”), then you will be taxed as an employee on the income generated from that contract.
If it is determined that you are self-employed (new terminology “off payroll worker rules do not apply”, old terminology “outside/not caught by IR35”) then these restrictions don’t apply, which gives you greater flexibility in the way you pay yourself from your company. This can improve your tax position ultimately meaning more funds are left in your pocket.
Important points
In essence IR35 is a status determination – should you be considered employed or self-employed.
The basic rules to IR35 have never changed, however the application of them constantly evolves. This is because case law dictates how the rules are applied.
IR35 is determined on a contract-by-contract basis, therefore if you have multiple contracts running it is possible for you to be working both inside and outside IR35.
The core tests with regard to IR35 are:
- Right of Substitution – the unfettered ability for you to provide another individual to do the work in your place.
- Control – you determine how your work is completed
- Mutuality of obligation – outside of the project you have been contracted for, your end client has not obligation to offer you further work and you have no obligation to take it.
In general, if you pass one of the above tests you will be considered self-employed and outside the scope of IR35. The more tests you pass the stronger the contract.
A common phrase you will hear regarding IR35 is “Substance over form”. Basically, that means the working practices you use to deliver your service must be in line with the terms in your contract. If they are not, then the contract term may be disregarded. Over the last 25 years there have been a huge number of cases heard in the tax courts. Each successive case can be helpful in giving more clarity in relation to the interpretation of these critical tests.
Tests such as:
- Do you use your own equipment in delivering your service?
- Is there a financial risk in providing your service?
- Are you on a fixed price contract where you must correct your own mistakes or are you on a time-based contract?
- Do you advertise your service?
- Do you have more than one client?
Additionally in April 2023 HMRC altered as to who was responsible for determining the IR35 status of a contract. Importantly this changes as to who is at risk for any additional tax should an IR35 status be successfully challenged by HMRC.
This change came in 2017 for those working in the public sector and 2021 for those working in the private sector where you are working for a medium to large sized entity.
They moved the responsibility for determining the contract status from the contractor (ie you) to the end client.
In doing so it also transferred the tax risk to the entity providing the IR35 status verdict.
Historically it was always down to the contractor to determine status. Therefore if HMRC successfully challenged the verdict the contractor would bear the responsibility for settling any amended tax and national insurance liabilities.
Now, where you are working for a medium/large sized entity your end client will determine the IR35 status. They will have to inform all parties in the working chain of the status by providing a “Status Determination Statement” so that tax is deducted accordingly.
In the event of HMRC successfully challenging such a statement any amended tax and national insurance liabilities will have to be settled by the end-client.
The positive of this is that you as a contractor are not financially at risk, however what we have seen is that end clients do not want to be open to this risk and as such they are determining more contracts are caught by IR35.
Where you are working for a Small/Micro sized entity the IR35 status determination remains with you as the contractor.
Why it’s important for contractors
The distinction between inside and outside IR35 isn’t just a technicality — it has direct financial consequences.
If HMRC reviews your contract and determines that you are inside IR35, you could face:
• A large tax bill, including backdated tax, national insurance, interest, and penalties.
• Less take-home pay, as a bigger chunk of your earnings goes to tax.
• Limited options to reduce tax through dividends or expenses.
For long-term contractors, incorrectly treating yourself as outside IR35 could lead to a stressful tax investigation and unexpected costs. On the other hand, getting your IR35 status right allows you to plan, make informed financial decisions, and run your business in a tax-efficient way.
How can contractors stay compliant?
IR35 can be complex and open to interpretation — which is why it’s wise to seek professional advice before signing contracts or taking on new engagements. Complete your due diligence in advance to limit surprises later.
You can never be 100% certain regarding a not caught status however you can create a very strong argument on day one. The stronger your argument is, the less likely it will be challenged by HMRC.
Here’s how you can protect yourself:
- Get your contract reviewed – An IR35 specialist can examine your contract and working practices to see if they are likely to fall inside or outside the rules.
- Look at your working practices – Even if your contract says you’re outside IR35, HMRC will look at the reality of how you work with the client. Make sure your day-to-day working practices match what’s written in the contract.
- Seek expert advice early – Proactive planning is far better than trying to fix problems later.
- Use the HMRC CEST tool – this can provide you with an opinion of the contract. HMRC have stated they will accept the result of this tool as long as the answers have been made correctly and the working practices are in line with the written contract signed by all parties.
How Hillier Hopkins can help
At Hillier Hopkins, we work closely with contractors, freelancers, and business owners to help them navigate the complexities of IR35. Whether you’re starting a new contract or want peace of mind about your existing arrangements, our team can provide:
- IR35 contract opinions
- Status determination support
- Tax planning advice
- Limited company guidance
- Representation during HMRC enquiries
With decades of experience in tax and accounting, we can help you understand your IR35 position clearly, avoid unnecessary tax liabilities, and ensure you’re operating compliantly and efficiently.
IR35 isn’t just about ticking a compliance box — it’s about making sure your hard-earned income is taxed fairly and legally. With the right knowledge and expert support, you can stay on the right side of the rules and focus on doing what you do best.
If you’re unsure about your IR35 status or want tailored advice, get in touch with Hillier Hopkins today.
