IR35 Guide for
Contractors

What is IR35?

IR35 — formally known as the Intermediaries Legislation (Chapter 8, ITEPA 2003 for private sector; Chapter 10 for off-payroll working) — is a set of tax rules that prevents workers from avoiding employment taxes by operating through a limited company when, in substance, they work like employees.

The name comes from the Inland Revenue press release numbered 35, issued in the 2000 Budget. More than two decades later, it remains one of the most contentious and litigated areas of UK tax law.

In practice, IR35 asks a single question: if the worker were engaged directly by the end client — with no limited company in between — would that engagement look like employment? If the answer is yes, the worker is "inside IR35" and subject to PAYE income tax and National Insurance on their earnings from that engagement. If the answer is no, they are "outside IR35" and entitled to the tax efficiencies that come with operating through a Ltd company.

Who Does IR35 Apply To?

IR35 applies where all of the following are true:

• A worker provides services to a client
• Those services are provided through an intermediary — typically a Ltd company (Personal Service Company / PSC), but also partnerships and managed service companies
• If the worker were engaged directly by the client, the relationship would resemble employment

It applies to:

• IT contractors, management consultants, engineers, financial services contractors, and other professional services contractors operating through a PSC
• Public sector workers in scope have been subject to off-payroll rules since April 2017
• Private and voluntary sector workers in scope have been subject to the off-payroll rules (Chapter 10) since April 2021

It does not apply to:

• Sole traders (who are assessed differently under employment status rules)
• Workers where there is a genuine third-party managed service or Statement of Works relationship
• Workers engaged by small private-sector clients (who use the original Chapter 8 rules — see Client Size & Liability)

The Three-Limb Test (Ready Mixed Concrete, 1968)

Every IR35 determination begins with the Ready Mixed Concrete test, established by MacKenna J in 1968 and still the starting point for every tribunal and HMRC enquiry today. A contract can only be one of employment if all three limbs are satisfied:

If any one of the three limbs cannot be satisfied, the engagement cannot be a contract of employment — and IR35 does not apply. In practice, the analysis rarely stops at the limbs: tribunals apply a holistic "overall picture" test (confirmed in Kickabout Productions, 2022) once the limbs have been assessed.

The Four-Step Modern Approach

Since the Court of Appeal's ruling in Atholl House (Kaye Adams) and the Supreme Court in PGMOL (2024), tribunals apply a four-step methodology:

1. Identify the real terms of the engagement — applying Autoclenz principles to look past contract wording to the actual working reality
2. Apply the Ready Mixed Concrete limbs
3. Construct the hypothetical direct contract — what would the engagement look like with no PSC in between?
4. Determine whether that hypothetical contract would be employment, looking at the whole picture

Employment Status Factors

Within the three-limb framework, tribunals and HMRC assessors weigh a range of specific factors. The table below summarises the most significant — note that no single factor is determinative: all must be weighed together.

Client Size and Who Bears Liability

One of the most practically important IR35 questions for contractors is: who decides my status, and who bears the liability if they get it wrong? The answer depends entirely on the size of the end client.

Identifying Your Client's Size

Before starting an engagement, confirm your client's legal size. Ask directly and request written confirmation. A client who is borderline or recently crossed a threshold may be uncertain — do not assume. Misidentifying client size is a compliance risk that sits with you.

From April 2025, the Companies Act thresholds that determine "small" increase for financial years starting on or after 6 April 2025. The impact on off-payroll status for most clients flows through with a delay — HMRC uses the last filed accounts and a two-year test, meaning for most clients the earliest practical impact is the 2027/28 tax year.

The Chain of Liability

Under Chapter 10, the liability chain runs: End Client → Agency (if any) → Fee Payer. If an end client fails to take reasonable care in their determination, or fails to issue an SDS, the liability remains with them rather than flowing down the chain. From 2026, umbrella company rules also impose joint and several liability across the supply chain for unpaid PAYE — if your umbrella fails to pay the correct tax, HMRC can pursue any party in the chain.

Status Determination Statements and CEST

Status Determination Statement (SDS)

Where Chapter 10 applies (medium/large private sector or public sector), the end client must issue a written SDS before payments are made. The SDS must:

• State whether the worker is inside or outside IR35
• Set out the reasons for that determination — not merely a conclusion
• Be provided to both the worker and the next party in the chain (e.g., the agency)

If a client issues an SDS without adequate reasons, or refuses to engage with a dispute, the liability shifts to the client. Workers have the right to dispute an SDS — the client must respond within 45 days with either a new determination or an explanation of why they are standing by the original.

HMRC's CEST Tool

HMRC's Check Employment Status for Tax (CEST) tool is available at tax.service.gov.uk/check-employment-status-for-tax. HMRC has committed to stand behind outcomes produced by CEST provided accurate information is input — making it a valuable tool for demonstrating reasonable care.

Key Case Law: 2024 and 2025

The past two years have produced some of the most significant IR35 and employment status case law since the legislation was introduced. The clear pattern: HMRC is winning, and arguments that previously offered a route outside IR35 are being systematically closed off.

How to Strengthen an Outside IR35 Position

Based on the current case law and HMRC guidance, the strongest outside-IR35 positions share a consistent set of characteristics. None of these alone guarantees a favourable determination — each engagement must be assessed on its specific facts — but all are worth building into your working practices and contracts.

Contractual protections

• Genuine right of substitution: Drafted as a real commercial right, not a theoretical clause. The client should be unable to veto a suitably qualified substitute. Document any time the right has been used or offered.
• Project-based scoping: Define the engagement around a specific deliverable with a clear start and end — not open-ended services. Include a defined scope of work.
• No exclusivity clause: You should be free to work with other clients. Any clause restricting this will be scrutinised.
• Financial risk provisions: Fixed-price elements, warranty or remediation obligations at your cost, and responsibility for own insurance all support a business-to-business character.

Practical working arrangements

• Control over method: You decide how the work is done. Outcomes and deliverables are agreed; the route to them is yours to determine.
• Own equipment: Use your own hardware, software licences, and professional tools where possible.
• Not integrated into client operations: Avoid being given a client email address, appearing on internal org charts, being included in performance appraisals, or attending internal social events as a matter of course.
• Multiple clients: Maintain a genuine portfolio of clients. Financial dependence on one client is a significant inside pointer.

Documentation and audit trail

• Conduct a documented IR35 assessment at the start of each engagement — and update it when terms or working practices change
• Retain all contracts, correspondence, and working records that evidence the nature of the relationship
• Use CEST as one data point — but supplement with a fuller analysis
• Consider professional IR35 insurance if you are borderline

If You Are Inside IR35

An inside-IR35 determination does not mean the engagement cannot proceed — but it does mean the tax treatment changes materially.

What changes

• For medium/large or public sector clients: the fee payer (client or agency) deducts PAYE income tax and NICs before paying your Ltd company. Your Ltd receives a net payment.
• For small private-sector clients: your Ltd company must account for a "deemed salary" through RTI, deducting PAYE and NICs and paying these to HMRC.
• The deemed salary broadly equals your gross fee income from the engagement, less a 5% expense allowance (the Chapter 8 allowance — removed from Chapter 10 in 2021) and any allowable pension contributions.

PAYE set-off (from April 2024)

A significant 2024 reform: where HMRC pursues a fee payer or client for unpaid PAYE following a challenge, previously paid taxes — Corporation Tax on profits, and dividend taxes — can now be offset against the PAYE liability. This ends the double-taxation issue that was one of the most severe financial consequences of an inside IR35 finding. Penalties, however, still apply to the gross figure.

Challenging an inside determination

If you receive an inside-IR35 Status Determination Statement from a client that you believe is wrong:

1. Request the written SDS with full reasons within 45 days of the determination
2. Submit a formal dispute, providing evidence supporting an outside position
3. The client must respond within 45 days — either issuing a revised SDS or confirming the original with reasons
4. If unresolved, you can escalate to HMRC and, ultimately, to tribunal

Always seek professional advice before challenging a determination — the process has formal procedural requirements, and a poorly constructed dispute can weaken your position.