What is IR35?
IR35 is UK tax legislation designed to combat tax avoidance by workers who supply services through an intermediary (like a limited company) but who would be employees if engaged directly.
IR35, also known as the "off-payroll working rules," determines whether a contractor should be taxed as an employee or can enjoy the tax benefits of running their own business. The name comes from the original press release number when announced in 1999.
**Inside IR35:** If your working arrangement looks like employment (regular hours, one client, using their equipment, being managed), you're "inside IR35" and should pay similar taxes to an employee—roughly 25% less take-home pay.
**Outside IR35:** If you're genuinely running a business (multiple clients, control over how you work, providing your own equipment, financial risk), you can remain "outside IR35" and benefit from more favourable tax treatment.
**Since April 2021:** For medium/large private sector clients, the client (not the contractor) determines IR35 status and is liable if they get it wrong. Many companies responded by banning contractors or forcing them inside IR35.
Understanding IR35 is essential for anyone considering contracting in the UK. The tax savings of being outside IR35 are significant, but so are the penalties for getting it wrong.
Key Points
- Determines if contractors should be taxed like employees
- Inside IR35 = roughly 25% less take-home pay
- Since 2021, clients determine status for medium/large companies
- Key factors: control, substitution rights, mutuality of obligation
- Getting it wrong can result in back-taxes and penalties
Frequently Asked Questions
Can I challenge an IR35 determination?
Yes. You can appeal to the client with evidence, use HMRC's CEST tool for guidance, or seek a professional IR35 review. Some contractors include IR35 clauses in contracts.
Should I avoid roles inside IR35?
Not necessarily. Calculate the rate needed to match outside-IR35 take-home pay (usually 15-20% higher). Some inside-IR35 roles still offer good compensation and interesting work.