IR35 exists to answer one question: is this person genuinely in business on their own account, or are they an employee with a limited company standing in between? If the working relationship looks like employment, HMRC expects it to be taxed like employment – regardless of what the paperwork calls it.
Inside or outside
Outside IR35 means you’re genuinely self-employed for that engagement: your company invoices gross, and you manage your own tax affairs. Inside IR35 means the engagement is, in substance, employment: broadly employee-level tax and National Insurance are due on the income, and the take-home difference is significant. Status is decided engagement by engagement – you can be outside on one contract and inside on another at the same time.
The three tests that matter
- Control – who decides what you do, and how, when and where you do it? The more the client directs you like a member of staff, the worse it looks.
- Substitution – could you genuinely send a suitably qualified replacement to do the work, or must it be you personally? A real right of substitution is strong evidence of being in business.
- Mutuality of obligation – is the client obliged to keep offering work, and are you obliged to keep accepting it? Ongoing mutual commitment is the shape of employment.
No single test settles it. HMRC and the tribunals look at the whole picture – and crucially, at how the work is actually done, not just what the contract says. An outside-IR35 contract with inside-IR35 working practices protects nobody.
Who decides
Since April 2021, medium and large private-sector clients (and all public-sector bodies, since 2017) are responsible for determining your status and telling you the outcome. Where the end client is a small company, the decision – and the risk – still sits with you and your limited company. Either way, the person carrying the risk should be able to evidence the decision.
What to actually do
- Review status per engagement, before it starts – not once a year in hindsight.
- Keep the contract and the day-to-day reality aligned; collect evidence of substitution rights, project scope and independence.
- Price inside-IR35 work accordingly – the tax difference is real and should be in your rate, not a surprise in January.
- Get a professional view where an engagement is material. This is one of the few areas of tax where reasonable people genuinely disagree – which is precisely why the evidence matters.
The Ledger is general guidance, not advice on your circumstances. Tax rates, thresholds and reliefs change – usually every April – so always confirm the current position before acting. If you’d like this applied to your business rather than in general, that’s exactly what we’re for.