What Is IR35 and How Does It Actually Work?

If you contract through your own limited company, sooner or later someone will hand you a contract with the words “outside IR35” written across the top — and expect you to know what that means. For a lot of the Kent contractors we speak to, that is the moment the panic sets in. IR35 has a reputation for being impenetrable. It really is not, once someone explains it in plain terms. This post does exactly that.

The idea behind IR35, in one sentence

IR35 exists to answer a single question: if we took your limited company out of the picture and looked only at how you actually work for your client, would this relationship look like employment? If the honest answer is yes, HMRC takes the view that you should be taxed broadly like an employee — not like a business supplying a service. That is the whole idea. Everything else is detail.

The rules are there to catch what HMRC calls the “disguised employee”: someone who leaves a job on a Friday, comes back on the Monday doing the identical role from behind a limited company, and pays materially less tax for the privilege. If that is not you — and for most genuine contractors it is not — IR35 is something to understand and evidence, not something to fear.

Inside IR35 versus outside IR35

The label tells you how the engagement is taxed.

Outside IR35 means HMRC accepts you are genuinely in business on your own account for that piece of work. Your company invoices the client, you pay corporation tax on the profit, and you extract money through the usual salary-and-dividend mix. This is the efficient position and the one most contractors want.

Inside IR35 means the engagement is treated as employment for tax. Income tax and National Insurance come off broadly as if you were on the payroll, and the headline advantage of working through a company largely disappears for that contract. You can still trade through the company — but the tax on that income is much closer to an employee’s.

Status is decided per contract, not per person

This is the point that trips people up most. IR35 is assessed engagement by engagement, not once for your whole business. It is entirely possible — and completely legitimate — to hold one contract that is outside IR35 and another that is inside at the same time. The status attaches to the working relationship, not to you or your company. So a clean determination on one job tells you nothing automatically about the next one.

What actually decides it: three core tests

Courts and HMRC look at how the relationship works in practice. Three factors carry the most weight:

• Personal service and substitution. Must you do the work personally, or could your company send a suitably qualified substitute in your place? A genuine, unfettered right of substitution points strongly towards being outside IR35.
• Control. Does the client direct how, when and where you work, as an employer would — or do you decide how to deliver the outcome you have been engaged for? The more autonomy you have, the better.
• Mutuality of obligation. Is the client obliged to offer you continuing work, and are you obliged to accept it? An employee has that ongoing mutual expectation. A contractor engaged for a defined project or period generally does not.

Other pointers matter too: whether you take genuine financial risk, provide your own equipment, can profit from working efficiently, and are treated as separate from the client’s own staff.

Working practices beat the wording every time

Here is the trap. A contract can be beautifully drafted, packed with the right outside-IR35 clauses — and count for very little if the day-to-day reality contradicts it. If you work fixed nine-to-five hours, report to a line manager, sit in the team meetings, book holiday through the client’s system and have done the same role for three years, HMRC will look straight past the paperwork to what is actually happening. The written contract is the starting point; your working practices are what get tested. Get both pointing the same way.

Who decides your status — and who carries the risk

This changed significantly in recent years and it depends on the size of your client.

Where your client is a medium or large private-sector business, or any public-sector body, the client decides your IR35 status. They must assess each engagement and issue you a Status Determination Statement (SDS) setting out the decision and the reasons for it. Responsibility for getting the tax right, and the risk if it is wrong, sits up the chain rather than with you.

Where your client is a small private company, the old rules still apply: your company decides its own status, operates the tax accordingly, and carries the risk if HMRC disagrees. A company counts as small broadly where it meets at least two of: turnover no more than £15 million, balance sheet total no more than £7.5 million, and no more than 50 employees (thresholds uplifted for accounting periods beginning on or after 6 April 2025). So one of the first things worth establishing about any new client is simply how big they are — it determines who is on the hook.

If you disagree with a determination

If a client assesses you as inside IR35 and you think they have got it wrong, you are not powerless. Where the client is responsible for the decision, there is a client-led disagreement process: you put your case in writing, and the client must consider it and respond, normally within 45 days, either confirming the original determination with reasons or issuing a revised one. It is worth using properly, with evidence about how the engagement actually works — not just an assertion that you disagree.

A cost that catches people out: travel and subsistence

On an inside-IR35 engagement you generally lose tax relief on travel and subsistence to that workplace, because it is treated like commuting to a normal job. Contractors who have factored a daily commute into their rate on the assumption it is a deductible business cost can find the numbers look very different once a contract is inside. Worth building into your thinking before you accept.

What about CEST?

CEST (“Check Employment Status for Tax”) is HMRC’s free online tool for assessing status. It has its uses and HMRC says it will stand behind the result where the answers are accurate and the working practices match. But it is only as good as the information fed into it, it has been criticised for handling mutuality of obligation poorly, and it does not always return a clear answer. For anything you are relying on, a proper professional contract-and-practices review is usually the safer route than a tool that reduces a nuanced legal question to a questionnaire.

Ten questions to ask before you accept a contract

Save this list. Running through it before you sign will tell you far more about your real IR35 position than the label on the front page:

1. Can my company send a substitute, and is that right genuine rather than cosmetic?
2. Who decides how, when and where the work gets done — me or the client?
3. Is the client obliged to give me work, and am I obliged to take it?
4. Am I engaged for a defined project or deliverable, or an open-ended role?
5. Will I use my own equipment, or the client’s?
6. Am I taking real financial risk — fixing my own mistakes at my own cost, for example?
7. Will I be treated as part of the client’s team, or clearly as an outside supplier?
8. Is the client small, or medium/large — so who determines my status?
9. If they must issue one, have I seen the Status Determination Statement and its reasons?
10. Do my day-to-day working practices actually match what the contract says?

How MCC Partners can help

We work with contractors and personal service companies across Gravesend, Dartford, Medway and the wider Kent area, and IR35 comes up constantly. We can review a contract and its working practices before you sign, help you respond to a determination you think is wrong, and make sure your company is set up efficiently whichever side of the line an engagement falls. A short conversation before you commit to a contract is worth far more than untangling it afterwards.

Not sure whether your next contract is genuinely outside IR35? Read our companion guide on choosing between an umbrella company and your own limited company, and our practical posts on allowable company expenses and paying yourself as a director in 2026/27.

Figures and tax rules are correct as at the date of writing (October 2026) and reflect the 2026/27 tax year. Tax rules change — and with a new Chancellor and an Autumn Budget expected, some may change again. Please check the current position or speak to us before acting on anything in this article.