IR35 and off-payroll working: a practical guide for contractors

As a professional contractor, the most significant potential hurdle to your future prosperity is the Intermediaries Legislation, commonly known as IR35.

Contents

• Background to IR35
• IR35 and the off-payroll rules
• IR35 vs off-payroll at a glance
• Do you fall within the IR35 net?
• Sole traders and IR35
• What being inside IR35 means in practice
• What is the financial cost of IR35?
• Challenging a status decision
• How to protect yourself from IR35
• Key case law that shapes IR35
• Market reality in 2025
• IR35 and off-payroll FAQs

Background to IR35

The IR35 legislation is named after the Inland Revenue press release, which first announced the Government’s plans to clamp down on disguised employment.

The legislation, which came into force in April 2000, is as controversial today as it was at the turn of the century

The rise of so-called disguised employment

Before IR35 was created, the number of contractors working via their own intermediaries (personal limited companies) was rising rapidly.

Limited company owners enjoy some tax benefits which are not available to permanent staff. The main advantage is that no National Insurance Contributions (NICs) are payable on company dividends.

It is worth noting that the tax difference between traditional employees and limited company owners has significantly narrowed over the past 20 years.

At the time of the implementation, the Government believed that many limited company professionals were, in fact, disguised employees.

In other words, they provided services to their clients in the same fashion as normal employees, and not in the manner of typical self-employed people.

Chapter 8 became law in April 2000

As a result, the Intermediaries Legislation was created to tackle cases of disguised employment.

If an individual’s contract is deemed to be caught by IR35, then the income from that contract is subject to standard PAYE income tax and NIC rules. The potential tax loss is significant.

The law governing IR35 is contained within Chapter 8 of the ITEPA 2003 (Income Tax (Earnings and Pensions) Act 2003) and the Social Security Contributions (Intermediaries) Regulations 2000 – SI 2000/727.

You can find out more about the history of IR35 in our timeline.

IR35 and the off-payroll rules

The most significant change to the existing IR35 rules since 2000 took effect in April 2017, when public sector contractors became subject to new off-payroll working rules.

Following a COVID delay, the off-payroll rules were rolled out to the private sector in April 2021.

Instead of self-certifying your IR35 status, it is now up to the engager (client) to determine whether or not your contract is subject to IR35. This decision is contained within a Status Determination Statement.

If it is, the client is responsible for deducting any income tax and National Insurance Contributions from your gross pay.

The off-payroll rules are contained within Chapter 10 of the ITEPA 2003.

Although Chapter 10 governs the off-payroll rules, the original IR35 rules are incorporated into Chapter 8. These combined rules are typically referred to as IR35.

Importantly, the off-payroll rules don’t apply if you work for a small company (as defined by the Companies Act) in the private sector.

Official guidance: Understanding off-payroll working (IR35) on GOV.UK.

Read our private sector off-payroll FAQs here.

IR35 vs off-payroll at a glance

Topic	IR35 (Chapter 8)	Off-payroll working (Chapter 10)
Who decides status	The contractor assesses their own status.	The client must determine status and issue an SDS.
Who operates PAYE if inside	The contractor calculates a deemed payment and accounts for PAYE/NIC via their company.	The client or fee-payer deducts PAYE/NIC before paying the contractor’s company.
Where it applies	All engagements where no Chapter 10 obligation on the client exists.	Public sector, and medium or large private sector clients.
Small company exemption	Not applicable, because Chapter 8 already applies when the client is small.	If the end-client is a small company, Chapter 10 does not apply. Status responsibility reverts to the contractor.
Disagreement process	N/A. The contractor is responsible.	The Client must operate the client-led disagreement process.

Do you fall within the IR35 net?

If you are selected for an HMRC IR35 compliance check, both the wording of your contract and the way you actually carry out the contract (your working practices) will be examined to determine whether you are employed or self-employed for tax purposes.

There are a large number of factors to consider when creating the overall picture of a contractor’s employment status.

The key question HMRC asks is: would the individual be an employee without the existence of the intermediary (the limited company)?

Some of the main pointers include:

• Control – is the contractor under the direct control and supervision of the client?
• Substitution – is the contractor permitted to provide a substitute if they are unable to work?
• Mutuality of Obligation – is there the expectation of future contract work when the current one expires?

Other indicators include financial risk, provision of equipment, being paid by project or milestone, and having multiple concurrent or consecutive clients.

Alongside these and other factors, how you perform your contract duties should also demonstrate that you are not a disguised employee.

For a complete list of the main employment status factors, read our detailed guide to IR35 compliance.

Sole traders and IR35

IR35 only applies where there is an intermediary, typically a personal service company. If you are trading as a sole trader there is no intermediary, so IR35 does not apply to that engagement.

However, employment status still matters for sole traders. The agency legislation (Section 44) tackles disguised employment for non-incorporated workers. If you are working under a client’s supervision, direction or control (SDC), you can be treated as an employee for tax purposes. See HMRC’s guidance at ESM2029.

In short, becoming a sole trader does not “get around” IR35. If you are not genuinely in business on your own account you are likely to be treated as employed for tax purposes, whatever structure you use.

Read more: Sole traders and IR35.

What being inside IR35 means in practice

• Reduced take-home pay – a higher proportion of your day rate is taxed under PAYE, with employer and employee NICs accounted for within the supply chain.
• Expenses – limited scope to claim travel, subsistence, and training that would normally be allowable for a business operating outside IR35.
• Pension planning – company pension strategies may need adapting. Salary sacrifice via an umbrella is different from company contributions in a PSC.
• Cash flow – fee-payers make deductions before funds reach your company, which can affect cash reserves and timing.
• Documentation – you need to retain a clear audit trail. Under Chapter 10, the SDS and any correspondence related to disagreements are key documents.

What is the financial cost of IR35?

If your contracts are caught by IR35, the financial consequences are significant. For example, a typical contractor on £350 per day, working 44 weeks per year, could be over £5,000 worse off if caught by IR35.

Try our inside IR35 calculator and enter your daily rate to find out more.

Challenging a status decision

Under the off-payroll rules, clients must provide a Status Determination Statement and operate a client-led disagreement process. If you disagree with the SDS:

1. Respond in writing, setting out which tests have been misapplied and how your working practices support an outside determination.
2. Provide objective evidence, such as substitution clauses and communications, project-based deliverables, milestone-based billing, and examples of control being exercised by you rather than the client.
3. Consider an independent review from a status specialist to support your case.

HMRC will not adjudicate SDS disputes between you and the client. If the client maintains an inside result, you must decide whether to proceed inside IR35, seek contract changes, or look for an alternative engagement.

How to protect yourself from IR35

If you are considering contracting via an umbrella company, then IR35 is not an issue, as you will pay standard tax and NICs on your income.

If you are a limited company contractor or are thinking of setting up as one, you should take steps to mitigate your risk of being selected for an IR35 investigation.

IR35 contract reviews

Always have your contracts reviewed by an employment status specialist.

They will typically examine both the contract wording and your working practices to determine if you are likely to be caught by IR35.

The specialist may be able to propose changes to the proposed contract and liaise with your agency to help implement them. Find out more here.

Working practices checklist

• Keep evidence of offered or exercised substitution, even if not used.
• Avoid employee-like behaviours such as asking for permission to take holidays. Agree deliverables and timelines instead.
• Show financial risk where appropriate, such as fixing a price for a defined scope.
• Market your services openly and maintain a business presence. Multiple clients over time help evidence independence.
• Keep contemporaneous notes of key interactions that relate to control, substitution, or mutuality.

Tax investigation insurance

You can take out IR35 insurance via Qdos, which will cover the costs of professional representation in the event of an IR35 compliance enquiry. Some policies also include cover for liabilities and penalties.

IR35 insurance tends to be competitively priced, often less than £200 per year. As a first step, try Qdos, who have offered IR35-related services since the rules were first implemented.

Key case law that shapes IR35

Employment status is determined using long-established case law. A few of the most cited principles are:

• The Ready Mixed Concrete case (1968) established the foundational three-part test. There must be personal service (the individual must perform the work personally), the employer must have sufficient control over how the work is done, and there must be mutuality of obligation between the parties.

• Autoclenz v Belcher (2011) was significant because it established that tribunals should look beyond what contracts say on paper to examine the actual working relationship in practice. This prevents employers from simply drafting contracts to avoid employment obligations when the reality suggests an employment relationship.

• The Lorraine Kelly (2019) and Kaye Adams (2020) cases are useful examples from the media industry that demonstrate how factors such as control over work, financial risk, and operating as an independent business can indicate self-employment rather than employment status.

You do not need to memorise the cases, but understanding the principles behind them helps you align both your contracts and day-to-day working practices.

Market reality in 2025

• Many end-clients continue to apply conservative policies, including blanket inside IR35 assessments or avoiding PSC engagements.
• Umbrella working remains common where clients are unwilling to engage limited companies.
• The tax gap between employees and limited company owners has narrowed, but the stakes remain significant for higher day rates.
• Compliance activity remains ongoing, with regular tribunal cases reported each year.

A useful 8-minute video explanation of IR35

This is one of the best video guides to IR35 we’ve seen, thanks to Barrister Daniel Barnett.

IR35 and off-payroll FAQs

What is the difference between IR35 and the off-payroll rules?
IR35 is the underlying legislation in Chapter 8 of ITEPA 2003.

The off-payroll rules in Chapter 10 change who is responsible for deciding your status. Under Chapter 8, you (the contractor) are responsible. Under Chapter 10, your client is responsible and must issue a Status Determination Statement.

Who deducts tax if I am inside IR35 under the off-payroll rules?
If your role is deemed inside IR35 under Chapter 10, the client or fee-payer must deduct PAYE and NICs before paying your company.

Do the off-payroll rules apply to all clients?
No. If your end-client is a small company under the Companies Act test, Chapter 10 does not apply. Chapter 8 applies and you remain responsible for assessing your own status.

Can I challenge an SDS I disagree with?
Yes. Clients must operate a client-led disagreement process. Provide clear evidence of your working practices and contract terms. Independent reviews can help support your challenge.

Should I rely on HMRC’s CEST tool?
Many clients use CEST, but it has some well-discussed limitations. A specialist review that considers contract terms and working practices is often more reliable. See our guide to IR35 compliance.

Can I be inside IR35 for one client and outside for another?
Yes. Status is determined engagement by engagement. Different roles can reasonably produce different outcomes.

What if the agency is the fee-payer?
Under Chapter 10, the fee-payer in the supply chain is responsible for operating PAYE where the role is inside IR35. This is often the agency.

What if my client is overseas?
The off-payroll rules can still apply where the client has a UK connection or the work is performed for a UK organisation. If Chapter 10 does not apply, Chapter 8 may still apply to you. Take advice on cross-border situations.

Does IR35 apply if I work partly from overseas?
It can. Status tests examine the working relationship, not just the location. Tax residence, where work is performed, and the client’s status all matter. Seek specialist advice.

How long can HMRC look back?
Time limits depend on behaviour and circumstances. Keep contracts, SDS documents, and working-practice evidence for the relevant years in case of an enquiry.

What if I switch to an umbrella company?
IR35 is not relevant. You are paid via PAYE by the umbrella, and standard employment taxes are deducted. Read our guide to umbrella companies and the off-payroll rules.

Where can I read the official guidance?
See Understanding off-payroll working (IR35) on GOV.UK. Also see our private sector off-payroll FAQs and IR35 compliance guide.

Where can I learn more about the history of IR35?
Read our IR35 history timeline for the key milestones since April 2000.