IR35: what freelancers and contractors actually need to know

What IR35 is — and what it is not

IR35 is a tax test, not an employment rights test. It determines whether HMRC should treat you as an employee for income tax and National Insurance purposes, even if you supply your services through your own limited company rather than as a direct employee. Being inside IR35 costs you money in tax — it does not give you holiday pay, sick pay, or unfair dismissal protection. Those depend on a separate employment-status analysis that sometimes gives a different answer.

The underlying question IR35 asks is hypothetical: if the intermediary company did not exist and you supplied services directly to the client, would you be an employee? If the answer is yes, and you supply those services through a personal service company, IR35 applies and the income should be taxed accordingly.

IR35 does not apply to sole traders — there is no intermediary. But sole traders who are genuinely employed face a different HMRC challenge: the client may be required to operate PAYE directly. The absence of a limited company is not a shield against misclassification.

Chapter 8 and Chapter 10 — who makes the call

The off-payroll working rules operate under two separate chapters of Part 2 of the Income Tax (Earnings and Pensions) Act 2003. Which chapter applies depends on who your client is.

Chapter 8 — small private-sector clients

If your client is a small private-sector business, Chapter 8 applies. Under Chapter 8, your personal service company is responsible for making the status determination and accounting for tax and National Insurance if the engagement falls inside IR35. The tax liability falls on your company through a deemed employment payment calculation at the end of the tax year.

What counts as small. A company is small for these purposes if it meets two of the following three conditions in its most recent financial year: annual turnover of £15 million or less; balance sheet total of £7.5 million or less; 50 or fewer employees. These thresholds were updated for financial years starting on or after 1 January 2025 and reflect the Companies Act 2006 definition of a small company as amended.

Chapter 10 — medium, large, and public-sector clients

If your client is a medium or large private-sector business, or any public-sector body, Chapter 10 applies. Under Chapter 10, the responsibility for determining IR35 status shifts to the end client. The client must assess the engagement, take reasonable care in doing so, and issue a Status Determination Statement (SDS) to you and to any agency or fee payer in the chain. If the determination is inside IR35, the fee payer — not you — must operate PAYE on the payments and deduct income tax and employee National Insurance contributions.

Status Determination Statements. The SDS must give the determination (inside or outside) and the reasons for it. You have the right to challenge it through the client's internal disagreement process within 45 days. The client must respond within 45 days. A disputed determination does not suspend PAYE obligations in the meantime.

The three questions that decide status

Employment status — including for IR35 purposes — turns on three factors that courts have developed over decades. All three must be considered together; no single factor is conclusive.

1. Personal service — can you send someone else?

If you personally must perform the services and cannot substitute another person without the client's consent, that points towards employment. If you have a genuine, unfettered right to send a suitably qualified substitute in your place, that points away from it. The substitution right must be realistic in practice — a contractual right that could never plausibly be exercised carries little weight. The Supreme Court confirmed in HMRC v Professional Game Match Officials Ltd [2024] UKSC 29 that personal service remains a critical factor and that a limited or constrained substitution right is weaker than an open one.

2. Control — who decides how the work is done?

Employment implies that the employer can direct what work is done, when, where, and how. In a genuine self-employment arrangement, the contractor decides how to deliver the agreed outcome. The degree of control that matters is control over method, not just outcome. PGMOL also confirmed that control can be relevant even if it is not exercised in practice during the engagement — the right to control, if it exists, is what matters.

3. Mutuality of obligation — is work guaranteed?

In an employment relationship, the employer is obliged to offer work and the employee is obliged to accept it. In a genuine self-employment arrangement, neither obligation exists — the contractor takes on each engagement on its own terms and the client is under no obligation to offer further work. Long-running retainers and exclusive arrangements can create mutuality if the economic reality is that the client is effectively guaranteeing ongoing work.

What your contract needs to say

A properly drafted contract is not sufficient on its own to determine IR35 status, but an improperly drafted contract can make an outside-IR35 position very difficult to defend. HMRC can disregard a contract that does not reflect the actual working relationship — but a contract that accurately documents genuine indicators of self-employment supports an outside-IR35 determination.

Substitution clause

The substitution right should be genuine, practical, and as unfettered as possible. A right to substitute any suitably qualified person is stronger than a right to substitute only within your own company. The contract should not require the client's consent to substitution unless the refusal grounds are narrow and objective. A substitution clause that the parties both know would never realistically be exercised will not help.

Advisory framing and decision-making

For consultancy and advisory engagements, the contract should make clear that the contractor's role is advisory only and that the client retains all decision-making authority. This documents the absence of control over outcome and the absence of the contractor's integration into the client's decision-making structure.

No integration language

The contract should not describe you as part of the client's team, subject to the client's working hours, or otherwise integrated into the client's business. Language that would be normal in an employment contract is problematic in a services contract.

Financial risk

Genuine self-employment involves financial risk — the possibility of delivering work at a loss, of not being paid for defective work, or of not winning the next engagement. A contract that documents this — through fixed fees, liability for defects, and no guarantee of future work — is more consistent with self-employment than one that mimics the security of employment.

Retainers and long-running engagements

Retainer agreements carry a higher IR35 risk profile than project-based contracts. The ongoing nature of the relationship, regular client contact, steady monthly income, and the Named Consultant model can collectively start to resemble the features HMRC associates with employment — personal service, integration, and mutuality of obligation — if working practices drift.

This does not mean retainers are incompatible with outside-IR35 status. It means they require more active management. The substitution right must be real. The client must not exercise day-to-day control over how work is delivered. The consultant must genuinely operate as an independent business with other clients. And the status should be reviewed whenever the commercial terms or working practices change materially.

Inside vs outside — what it means in practice

Outside IR35

If your engagement falls outside IR35, your personal service company receives the client fees gross and you account for your own income tax and National Insurance through the company's normal tax arrangements — salary, dividends, and corporation tax. You retain the tax-planning flexibility that operating through a limited company provides.

Inside IR35 — Chapter 10

Under Chapter 10, where the client has determined inside IR35, the fee payer deducts income tax and employee National Insurance from the payments before they reach your company, and pays employer National Insurance on top. Your company receives the net amount. You do not get employment rights. The tax efficiency of the limited company structure is largely eliminated.

Inside IR35 — Chapter 8

Under Chapter 8, your company receives the fees gross. At the end of the tax year, your company must calculate a deemed employment payment — broadly, the fees received less allowable deductions — and account for income tax and both employee and employer National Insurance on that amount.

The 6 April 2024 set-off

From 6 April 2024, where HMRC makes an assessment under the off-payroll rules, it must set off income tax and National Insurance already paid by the contractor's company on the same income. This prevents the double taxation that made historical IR35 assessments financially devastating. The set-off applies to engagements on or after 6 April 2024. For earlier periods there is no equivalent mechanism.

CEST and its limits

HMRC's Check Employment Status for Tax (CEST) tool provides an online status assessment. HMRC has committed to stand behind a CEST determination where it is used correctly — meaning the facts entered are accurate and the working practices match those facts. That commitment matters: if HMRC later investigates and the facts entered into CEST accurately reflected the engagement, HMRC will not normally pursue a different determination.

But CEST has significant limitations. It does not cover all scenarios — particularly complex substitution arrangements. It has been criticised for producing inside-IR35 results in borderline cases. And a CEST result is only as reliable as the facts entered: a determination based on how the engagement is contractually described, rather than how it actually operates, gives limited protection if an investigation reveals a different reality.

CEST is a useful starting point, not a substitute for a properly drafted contract that accurately reflects the actual working relationship.