Daily Junction.mobi portalBusiness · September 19, 2025 · Marcus Vale · 6 min
A plain-English guide to IR35, the UK's off-payroll working rules: what 'inside' and 'outside' IR35 mean, the tests that decide status, and who is responsible for getting it right.
Few pieces of tax legislation cause as much anxiety among contractors and the businesses that hire them as IR35. The acronym is shorthand for rules about whether someone working through their own company is, in reality, an employee in disguise — and getting the answer wrong can be expensive for either side. Yet the underlying principle is straightforward once the jargon is stripped away. This guide explains what IR35 is, what "inside" and "outside" mean, the tests that decide status, and who is now responsible for the decision. This is general information, not tax or legal advice.
IR35 — formally the "off-payroll working rules" — is UK tax legislation aimed at stopping "disguised employment". It targets situations where a worker provides their services through an intermediary, usually their own limited company (often called a personal service company), but works in a way that looks just like being an employee of the client.
The concern is fairness. A genuine employee pays income tax and National Insurance through PAYE. If someone does essentially the same job but routes their pay through a company, they could pay less tax while the client avoids employer obligations — even though, day to day, the relationship is indistinguishable from employment. IR35 exists to tax those engagements broadly as the employment they resemble.
IR35 is not about whether you have a limited company. It is about whether the working relationship behind a contract looks like employment or like genuine business-to-business work.
Understanding it matters whenever a business uses contractors rather than staff — a choice we explore more fully in contractor versus employee.
The whole system turns on a single classification for each engagement:
Crucially, the label on the contract does not decide this. HMRC looks at the reality of the working arrangement. A contract that says "outside IR35" means nothing if the day-to-day relationship behaves like employment.
There is no single rule. Status is judged by weighing several factors drawn from decades of employment case law. Three carry the most weight:
Other factors add colour to the picture:
No single factor is decisive; HMRC and the courts look at the overall picture. GOV.UK provides the Check Employment Status for Tax (CEST) tool to help assess a particular engagement, though it is guidance rather than a guarantee.
This is where the rules have shifted, and where responsibility — and the tax risk — sits depends on the client:
| Type of client | Who assesses IR35 status |
|---|---|
| Public-sector bodies | The client (end hirer) |
| Medium and large private-sector clients | The client (end hirer) |
| Small private-sector clients | The contractor's own company |
For engagements with most medium and large private-sector clients and public-sector organisations, the client must assess each contractor's status and issue a Status Determination Statement (SDS) explaining the decision and the reasons for it. The responsibility for accounting for tax then sits within the supply chain rather than solely with the contractor.
Where the client is a small private company, the older position generally still applies: the contractor's own limited company is responsible for deciding its IR35 status. The detailed definitions of "small" and the precise mechanics can change, so always confirm the current rules on GOV.UK.
For businesses that engage contractors, getting status determinations right is now a compliance responsibility, not an afterthought. Blanket decisions — treating every contractor as inside IR35 to be safe — can drive away talent and may not reflect each engagement's reality. Sensible practice is to assess each role honestly, document the reasoning, and keep contracts and working practices aligned. This connects to wider questions of how you structure roles and reward, covered in our guides on how to write a job description and registering a UK company.
For contractors, status affects take-home pay and how you run your company. It pays to understand the factors, keep working practices genuinely business-like where you operate outside IR35, and seek specialist advice for important engagements.
IR35 asks one essential question: behind the contract and the company, does this engagement look like employment or like genuine business-to-business work? "Inside" means it is taxed like a job; "outside" means it is treated as real self-employment. Status hinges on control, personal service and mutuality of obligation, judged on the working reality rather than the paperwork — and for most medium and large clients, it is now the client who must make and document that call. Because the rules are detailed and can change, treat this as a starting point only. This is general information, not tax or legal advice; check GOV.UK and take professional guidance for your situation.
![[View image]](/img/what-is-ir35.jpg){kind=link}