IR35 for UK Contractors
Why IR35 Matters to Every UK Contractor
In the spring of 2017, Rachel, a seasoned IT contractor from Manchester, received a letter from her client. It read: “We have assessed your role as inside IR35.” Suddenly, Rachel’s take-home pay shrank and her independence seemed threatened—not by a change in her work, but by tax law. Rachel’s story is not unique. IR35 has changed the landscape for thousands of contractors, shaping careers, finances, and even the UK’s talent market.
But what is IR35? Why does it feel so complicated? And, most importantly, how can contractors navigate these rules without losing sleep—or income?
The Heart of IR35: Rules, History, and Who’s Affected
IR35, known formally as the “Intermediaries Legislation,” is tax law designed to tackle “disguised employment.” If you provide services through your own limited company or similar intermediary, IR35 decides whether you’re really self-employed—or just an employee in all but name.
The Backstory
Origins: Announced in 1999 by Chancellor Gordon Brown, IR35 came into force in April 2000 to close loopholes exploited by “personal service companies.”
Major Reforms:
2017: Public sector organisations became responsible for deciding if contractors fall inside or outside IR35.
2021: The same responsibility shifted to medium and large private sector clients.
2022: A proposed repeal was reversed—the current rules stand.
Who’s in the Firing Line?
Contractors working through limited companies (PSCs), partnerships, or intermediaries
End clients (public sector, medium/large private sector)
Recruitment agencies and fee payers
Small private companies are generally off the hook—if they meet two of these: turnover ≤ £10.2m, balance sheet ≤ £5.1m, ≤ 50 employees.
Inside vs Outside IR35: What It Means For You
Let’s break it down:
| Aspect | Inside IR35 | Outside IR35 |
|---|---|---|
| Tax Treatment | PAYE, NICs deducted | Self-assessment, dividends |
| Who Decides | Client (except small clients) | Contractor (small clients) |
| Status Determination | SDS issued by client | Contractor self-assesses |
| Employment Rights | No (unless challenged) | No |
| Financial Impact | Up to 25% more tax | More tax-efficient |
| Dispute Process | Yes, via client | N/A (contractor self-assesses) |
Inside IR35: You’re taxed like an employee—PAYE and NICs come straight off your pay. But you don’t get employee benefits like sick pay or holiday.
Outside IR35: You keep your tax efficiency, paying yourself via dividends and salary. The catch? You must prove you’re genuinely in business on your own account.
How Is IR35 Status Determined?
Status hinges on working practices, not just what’s written in your contract. HMRC and the courts look at:
Right of Substitution: Can you send someone else in your place?
Control: Who decides how, when, and where you work?
Mutuality of Obligation (MOO): Is there an ongoing obligation for work to be offered and accepted?
Other clues: Are you integrated into the client’s business? Do you take financial risk? Use your own equipment?
Who decides?
Public sector and medium/large private sector: The client must assess each contractor, providing a written Status Determination Statement (SDS).
Small private sector: The contractor decides.
If you disagree with an SDS, you can challenge it—the client has 45 days to respond.
Tools for the job:
Professional contract reviews
Recent Changes: What’s New?
2017: Public sector clients take responsibility for IR35 status.
2021: Private sector reforms extend this to medium/large clients.
2022: Proposed repeal scrapped—current rules remain.
Today, most contractors rely on their client to decide their IR35 status, unless working for a small business.
The Financial Realities
Being inside IR35 can cut take-home pay by up to 25%.
Contractors inside IR35 often pay 14–25% more tax than employees, but still lack employment rights.
Non-compliance? Expect HMRC to demand backdated tax and NICs, with interest and penalties.
The market impact is real: Some sectors (IT, logistics) have seen contractor shortages and project delays.
Staying Compliant: Actions for Contractors and Clients
Contractors: Stay One Step Ahead
Review every contract: Make sure it reflects real self-employment.
Gather evidence: Keep logs of substitution, control, and financial risk.
Seek professional advice: IR35 specialists can review contracts and working practices.
Use available tools: CEST, IR35 calculators, and professional reviews.
Clients: Get it Right, Every Time
Assess each engagement individually—don’t make blanket decisions.
Provide clear, reasoned SDSs to contractors.
Respond to disputes promptly (within 45 days).
Keep thorough records; HMRC may ask to see them.
Agencies: Know Your Liabilities
If you pay the contractor’s intermediary, you may become the “fee payer” and responsible for tax deductions.
Real-World Questions: IR35 FAQs
What is IR35?
UK tax law targeting disguised employment through intermediaries.
What does “inside IR35” mean?
Treated as employment for tax; PAYE and NICs deducted.
Who decides IR35 status?
Usually the client (unless small business); otherwise, the contractor.
What is a Status Determination Statement?
A written explanation from the client outlining your IR35 status.
Can you challenge an SDS?
Yes. Clients must respond within 45 days.
Does IR35 apply to umbrella companies or sole traders?
Not directly. Umbrella workers are already under PAYE; sole traders are assessed under different rules.
Who’s Involved: The IR35 Ecosystem
HMRC: Enforces the rules
Personal Service Companies: Contractor’s limited companies
End Clients: Businesses hiring contractors
Agencies: Sometimes responsible for tax
Accountants/Legal Advisors: Can help with compliance
Umbrella Companies: Employ contractors directly; IR35 not usually relevant
IR35 by the Numbers
HMRC estimates annual losses of £1.2 billion in private sector non-compliance (2022/23).
Public sector reforms raised an extra £410–£550 million per year in tax.
Typical contractor inside IR35 pays up to 25% more tax than outside—with no added employment rights.
Where to Learn More
What Should Contractors Do Next?
Stay informed: The rules evolve—subscribe to updates from HMRC and trusted advisors.
Get contracts reviewed: Professional checks can save thousands in tax bills and penalties.
Document your working practices: Evidence is power if HMRC comes calling.
Challenge unfair SDSs: Use your right to dispute and demand clear reasoning.
“IR35 is a test of independence. It’s not just what’s on paper—it’s how you work day-to-day.”
Key Takeaways for UK Contractors
Every contract must be assessed for IR35 individually.
Clients are now responsible for most status decisions—except for small businesses.
Non-compliance is expensive.
Professional advice and up-to-date knowledge are your best defences.
IR35 can feel like a maze, but with the right guidance, contractors can navigate its twists and emerge stronger. Rachel did—and so can you.
