IR35 is the anti-avoidance legislation that determines whether a contractor working through a limited company should be treated as an employee for tax purposes. If IR35 applies to an engagement, the income is taxed as if it were employment income — meaning you pay income tax and National Insurance at the same rates as an employee, wiping out much of the tax advantage of working through a limited company.
Who Decides?
Since April 2021, medium and large private sector clients are responsible for determining the IR35 status of contractors they engage. Small private sector clients are exempt — the contractor remains responsible for their own status determination. A client is "small" if it meets at least two of these criteria: turnover under £10.2 million, balance sheet under £5.1 million, or fewer than 50 employees.
Key Factors in Status Determination
HMRC and the courts look at several factors when assessing whether a contract falls inside or outside IR35. The three most important are control (does the client control how, when, and where you work?), substitution (could you send a suitably qualified substitute in your place?), and mutuality of obligation (is the client obliged to offer you work, and are you obliged to accept it?).
Other relevant factors include whether you provide your own equipment, whether you bear financial risk, whether you are part of the client's organisation, and whether you work for multiple clients simultaneously.
Inside vs Outside IR35
The financial difference between being inside and outside IR35 is significant. A contractor earning £500 per day outside IR35 might take home around £90,000 to £100,000 per year after tax. The same contractor inside IR35 might take home only £65,000 to £75,000 — a difference of £20,000 to £30,000 per year.
Use our IR35 calculator to compare your take-home pay inside and outside IR35, and see how the status determination affects your finances.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, advising contractors on IR35 compliance and tax-efficient structuring.