IR35: What Every UK Freelancer Needs to Know

What Is IR35?

IR35 (officially known as the off-payroll working rules) is HMRC legislation designed to ensure that workers who operate through an intermediary — typically a personal service company (limited company) — pay broadly the same tax as employees, if their working arrangement resembles employment.

If you're a sole trader, IR35 does not directly apply to you in the same way — you're already taxed as an individual. IR35 primarily affects limited company contractors.

Inside vs Outside IR35

A contract or engagement is described as being inside IR35 if HMRC would consider you to be a "disguised employee" — working like an employee but through a company to reduce tax. In this case, the fee you receive is treated like employment income and taxed accordingly.

A contract is outside IR35 if you genuinely operate as an independent contractor: you have control over how and when you work, you take financial risk, and you can send a substitute to do the work in your place.

The Three Key Status Tests

HMRC considers three main factors when determining IR35 status:

• Control: Does the client control how, when, and where you work? High client control points to employment.
• Substitution: Can you send another person to do the work in your place? A genuine right of substitution points to self-employment.
• Mutuality of obligation: Is the client obliged to offer you work, and are you obliged to accept it? If so, that resembles employment.

Other factors — financial risk, provision of equipment, integration into the client's organisation — also influence the assessment.

Who Decides Your IR35 Status?

Since April 2021, the responsibility for determining IR35 status in the private sector shifted to medium and large clients (those meeting two of three criteria: 50+ employees, £10.2m+ turnover, £5.1m+ balance sheet). Small clients still leave the determination to the contractor's company.

If your client determines you are inside IR35, they must deduct Income Tax and National Insurance before paying you. This significantly reduces your take-home pay compared to operating outside IR35.

HMRC's CEST Tool

HMRC provides a free tool called Check Employment Status for Tax (CEST) at gov.uk. It asks questions about your working arrangement and provides a determination. While not legally binding, completing CEST and keeping the result is useful evidence if HMRC ever investigates.

Protecting Your Outside IR35 Status

If you believe your contract is outside IR35, take steps to ensure the reality matches the contract:

• Ensure your contract includes an explicit right of substitution — and that you could genuinely exercise it
• Avoid being given a company email address, business cards, or treated like a staff member
• Work for multiple clients, not just one that resembles an employer
• Use your own equipment where possible
• Invoice on the basis of deliverables, not hours

What About Sole Traders?

Sole traders aren't affected by IR35 in the same technical sense. However, HMRC can still argue that a sole trader's engagement resembles employment and seek to reclassify it. The same status tests apply — particularly mutuality of obligation and control. If you operate as a sole trader but consistently work for just one client in an employee-like way, it's worth reviewing your situation with a tax adviser.

Getting Professional Advice

IR35 is complex and the consequences of getting it wrong are significant — potentially years of back-taxes, interest, and penalties. If you're unsure about your status, consult a specialist contractor accountant or IR35 adviser before accepting an engagement.