What is IR35 and how does it affect contractors?

Full answer

IR35, formally known as the off-payroll working rules, targets a specific tax avoidance concern: someone who works through their own personal service company (a limited company they own and control) for a client, in a way that closely resembles being a regular employee of that client, rather than genuinely operating as an independent business, but who benefits from more favourable tax treatment as a company director (often paying themselves partly through dividends) compared with the Income Tax and National Insurance an equivalent employee would pay. Whether IR35 applies to a specific engagement, meaning the contractor should be taxed broadly as if they were an employee for that assignment (a status often called being 'inside IR35'), depends on the actual working practices, not simply the paperwork -- key factors include the degree of control the client has over how, when and where the work is done, whether the contractor could genuinely send a substitute to do the work instead of them personally, and whether there is 'mutuality of obligation' (an ongoing expectation of work being offered and accepted, similar to employment). Since April 2021, for engagements with medium or large private-sector clients (and all public-sector clients since 2017), it is the client -- not the contractor's own limited company -- who is legally responsible for determining IR35 status and issuing a Status Determination Statement, and if a contractor is found to be 'inside IR35', the fee-payer must deduct Income Tax and National Insurance broadly as if the contractor were an employee, before paying the remainder to the contractor's company, significantly reducing the tax efficiency compared with being genuinely 'outside IR35'. Small private-sector clients remain exempt from this responsibility shift, meaning the contractor's own company still self-assesses IR35 status for engagements with genuinely small businesses.

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