IR35 Explained: Inside vs Outside

IR35, also known as the off-payroll working rules, is a piece of tax legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be classed as an employee if the intermediary was not used. These workers are often referred to as "disguised employees."

What Does "Inside IR35" Mean?

If a contract is deemed "Inside IR35," it means HMRC considers you to be an employee for tax purposes. In this scenario, you must pay Income Tax and National Insurance Contributions (NICs) exactly as an employee would.

If you are inside IR35, your fee-payer (usually the client or the recruitment agency) will deduct these taxes at source through the PAYE system before paying your limited company. This significantly reduces your net take-home pay compared to operating outside IR35.

What Does "Outside IR35" Mean?

Being "Outside IR35" means you are operating as a genuine business. You are responsible for your own taxes and can pay yourself a combination of salary and dividends, which is generally more tax-efficient.

When outside IR35, your limited company receives the gross payment from the client, and you manage your corporate and personal tax liabilities accordingly.

How is IR35 Status Determined?

Determining IR35 status is complex and relies on case law rather than a simple checklist. The key factors considered include:

• Control: Does the client control how, when, and where you complete the work? High control suggests employment (Inside IR35).
• Substitution: Can you send a substitute to do the work if you are unavailable? A genuine right of substitution strongly indicates self-employment (Outside IR35).
• Mutuality of Obligation (MOO): Is the client obliged to offer you work, and are you obliged to accept it? If yes, this points towards employment.
• Financial Risk: Do you bear financial risk? For example, do you have to rectify mistakes at your own cost? Financial risk is a hallmark of being in business on your own account.
• Part and Parcel: Are you integrated into the client's organisation? (e.g., using their equipment, attending staff meetings, receiving employee benefits).

Who Decides Your Status?

For medium and large private sector organisations, and all public sector bodies, the client is responsible for determining your IR35 status and providing a Status Determination Statement (SDS). If you contract for a "small" private sector company, the responsibility for determining status remains with you, the contractor.

Protecting Yourself

If you believe you are operating outside IR35, it is vital to ensure your written contract reflects your working practices and that you have evidence to support your position. Professional contract reviews and IR35 insurance are highly recommended for contractors navigating these complex rules.