IR35 Explained: A Complete Guide for Contractors and Finance Professionals

What Is IR35?

IR35 (officially the off-payroll working rules) is UK tax legislation designed to ensure that contractors who work like employees pay broadly the same tax and National Insurance as employees, even when they work through their own personal service company (PSC). Getting IR35 status wrong can result in significant tax bills and penalties for either the contractor or the end client.

IR35 Status: Inside vs Outside

"Inside IR35" means HMRC considers the contractor to be effectively an employee of the end client for tax purposes. They must pay income tax and NIC as if employed, typically via a deemed payment calculation. "Outside IR35" means the contractor is genuinely self-employed and can pay themselves through dividends and salary in the usual PSC structure.

Who Decides IR35 Status?

From April 2021, large and medium-sized private sector clients are responsible for determining IR35 status and must provide a Status Determination Statement (SDS). Small companies (meeting two of: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees) are exempt — the contractor determines their own status. Public sector clients have been responsible since April 2017.

The Key Tests for IR35

HMRC and courts consider: Substitution (can you send someone else to do the work?), Control (does the client control how, where and when you work?), Mutuality of obligation (is there an obligation on both sides to offer and accept work?). Secondary factors include financial risk, integration into the client's organisation, and provision of equipment. HMRC's CEST (Check Employment Status for Tax) tool gives a non-binding determination.

Finance Professionals and IR35

Finance and accounting contractors are a common target for IR35 investigations. Interim FDs, financial controllers, and management accountants working through PSCs on long-term contracts with a single client are particularly exposed. Having multiple clients, working from your own premises, and substitution rights all support outside IR35 status.

Further Reading

• Payroll and NIC Guide
• ACCA TX Taxation Guide
• Employment Tax CPD

CPD on IR35

Learnsignal offers employment tax CPD covering IR35, off-payroll working, and related legislation. Explore CPD courses.

FAQ

Can HMRC investigate historic IR35 status?

Yes — HMRC can investigate up to six years back for careless errors and 20 years for deliberate non-compliance. The stakes are high and professional advice is strongly recommended for those with uncertain IR35 status.

What is a Status Determination Statement?

An SDS is a written statement from the end client setting out their IR35 determination and the reasons for it. Contractors have the right to challenge the determination through the client disagreement process.