If you’re a contractor, freelancer, or running a small business, it’s essential to understand IR35—both how it works and how it could impact you financially. IR35 is basically a rule that helps determine if you’re paying the right amount of tax and National Insurance.
Why Does IR35 Matter to Me?
Your IR35 status, which can differ depending on each individual contract, decides how you’ll be taxed by HMRC. It’s crucial to understand whether you might be considered a “disguised employee” of the client you’re working for on any given contract. Since IR35 rules apply to all kinds of sectors and specializations, it’s wise to be aware of how it might affect your work arrangements.
How Is IR35 Status Determined?
HMRC has a tool called CEST (Check Employment Status for Tax) that’s meant to help you gauge whether a contract falls inside or outside IR35. But heads up—this tool is more of a guide than a guarantee. It’s known to favor HMRC’s interpretation, which can sometimes lead to contractors incorrectly being classed as “inside” IR35, even though that may not hold up under legal scrutiny.
Key Factors in Determining IR35 Status
Whether you’re inside or outside IR35 depends on various factors, and HMRC will look at each contract individually. Some of the primary aspects they evaluate are:
1. Contract Type: “Contract of Service” (employment) vs. “Contract for Services” (client-contractor)
- Control: Your contract should show that you decide how the work gets done, using your own methods.
- Substitution: You should have the ability to bring in someone else to do the work, if needed, at your own discretion and risk.
- Mutuality of Obligation: This means there’s no expectation for ongoing work from the client after the contract ends. Your contract should clearly outline an end date based on project completion.
- Dismissal Rights: Ideally, the client should be able to end the contract quickly (sometimes with no notice). If there’s a lengthy notice period, HMRC may view you as a regular employee.
Even with a solid contract, HMRC will look at how things actually work in practice to confirm that you’re working as a contractor and not a disguised employee.
2. Working Practices: Acting as an Independent Business
To remain outside IR35, it’s crucial to operate in ways that clearly show you’re an independent business. Some ways to do this include:
- Having your own insurance.
- Working with multiple clients or having the flexibility to do so.
- Taking on financial risk—for example, fixing mistakes at your own expense.
- Being responsible for your own success or failure as a business.
- Providing your own equipment (laptop, software, etc.).
- Avoiding employee-like benefits from clients, like parking spaces or security passes that identify you as staff.
- Showing your intent to be a genuine business —think business cards, a website, and company branding.
3. Control Over Work Details
You should ideally control how, when, and where you work. If the client sets your hours, workplace, or gives you specific instructions on how to complete tasks, this can look like you’re an employee.
4. Financial Risk
Fixed-price quotes for projects help show you’re taking on risk. You should also be responsible for correcting any mistakes without additional payment.
5. Proof of Self-Employment or Work Through Limited Company
It’s a good idea to show that you’re investing in your own business through things like business cards, a website, company email, VAT registration, insurance, and equipment.
Collecting Evidence: Your Best Defense
Good record-keeping can be a lifesaver if HMRC ever questions your status. Here are some documents that can help prove you’re running an independent business:
- Insurance policies and schedules.
- Proof of business premises—leases, contracts, or utility bills.
- Client contracts, especially for long-standing relationships.
- Records of job bids and proposals for fixed-price work.
- Proof of marketing efforts—receipts and copies of advertising materials.
- Documentation of any self-funded repairs or corrections.
- Business documents—like business cards, stationery, a business bank account, and professional insurance.
- Invoices and payment terms.
Keeping thorough records of these items can go a long way in demonstrating your status as a legitimate independent contractor.