Answers · UK 2025/26

What does it mean to be inside or outside IR35?

Being "inside IR35" means HMRC considers your contract role to be, in substance, one of employment rather than genuine self-employment -- so Income Tax and National Insurance must be deducted broadly as if you were an employee, even if you operate through your own limited company. Being "outside IR35" means the working arrangement is genuinely self-employed in nature, allowing you to be paid gross and manage your own tax through your company, generally more tax-efficiently.

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IR35 (also known as the "off-payroll working rules") is tax legislation designed to ensure that people who work like employees, but do so through an intermediary such as their own personal service company (PSC), pay broadly similar Income Tax and National Insurance to those who are directly employed, rather than gaining a tax advantage purely through the corporate structure used. **What determines inside vs outside status** Status isn't a matter of choice or simple labelling -- it depends on the genuine nature of the working relationship, assessed against factors the courts and HMRC have developed over many years, primarily: control (does the client control how, when, and where the work is done, as they would with an employee, or does the contractor have genuine autonomy?), substitution (could the contractor genuinely send a substitute to do the work instead of them personally, and would the client accept this?), and mutuality of obligation (is the client obliged to offer work and the contractor obliged to accept it, similar to an ongoing employment relationship, or is each engagement genuinely a one-off arrangement?). **Who decides status -- public sector and medium/large private sector** Since reforms in 2017 (public sector) and 2021 (medium and large private sector organisations), the RESPONSIBILITY for determining IR35 status has shifted from the contractor's own company to the end client (the organisation engaging the contractor) for most engagements with medium or large businesses -- the client must issue a Status Determination Statement (SDS) explaining their conclusion, and the fee-payer (often an agency in the contractual chain) becomes responsible for deducting tax and NI if the determination is "inside IR35". **Small companies are an exception** Where the end client qualifies as a "small company" under the Companies Act definition, the responsibility for determining IR35 status remains with the contractor's own personal service company, rather than shifting to the client -- this exception means contractors working for genuinely small businesses still self-assess their own status in the way that applied to everyone before the 2017/2021 reforms. **Financial impact of being inside IR35** If a role is determined to be inside IR35, the fee-payer must deduct Income Tax and employee National Insurance from payments to the contractor's company broadly as though the contractor were an employee (though without gaining direct employment rights like holiday pay or sick pay as a result) -- this can significantly reduce take-home pay compared with an equivalent outside-IR35 engagement, since the tax-efficient combination of a small salary plus dividends from the personal service company is no longer available for that income. **Financial position if outside IR35** If genuinely outside IR35, the contractor's company is paid gross, and the contractor can then decide how to extract money from their company (commonly a mix of a modest salary and dividends), generally resulting in a lower overall tax and National Insurance burden compared with an equivalent inside-IR35 arrangement, reflecting the genuine commercial risk and autonomy of operating as a separate business. **HMRC's CEST tool** HMRC provides an online tool, "Check Employment Status for Tax" (CEST), intended to help end clients and contractors assess status -- while widely used, CEST's assessments aren't always considered fully reliable or comprehensive by tax specialists, particularly for more borderline cases, and many contractors and clients also seek independent professional or legal review of contracts and working practices rather than relying on CEST alone. **Consequences of getting it wrong** If HMRC successfully challenges a status determination (concluding a role treated as outside IR35 should actually have been inside), significant backdated tax, National Insurance, interest, and potentially penalties can become due -- this risk sits primarily with the fee-payer or client for engagements where they're responsible for the determination, though contractors themselves can still face consequences (including for periods before the 2021 reforms, or for small-company engagements where they remain responsible for their own status). **Practical tip** Contractors should keep clear records of their actual working practices (not just the written contract terms, since HMRC and tribunals look at what genuinely happens in practice, not just what a contract says), and both contractors and clients should seek a proper, well-reasoned Status Determination Statement with clear justification, rather than treating IR35 assessment as a box-ticking exercise, given the potentially significant financial consequences of getting the determination wrong.