What is IR35?

What is IR35?

If you’re a contractor, freelancer or self-employed consultant, the chances are you’ve heard the phrase ‘IR35’ mentioned by your accountant, colleagues or agency. But what exactly is IR35, and how does it affect you?

While business insurance cover such as professional indemnity insurance, public liability insurance and employer’s liability insurance are commonplace for contractors, IR35 is something of a mystery for many.

IR35, named after the ‘Inland Revenue 35’ leaflet which announced the change, was introduced back in 2000 to prevent individuals (who were essentially disguised employees) setting up limited companies to minimise tax and national insurance contributions.

Working this way does not just benefit the contractor though – employers also benefit as this way of hiring workers means they don’t have to give them employee benefits or pay employers National Insurance contributions.

To be ‘inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE. And, if you’re outside then HMRC deems you as a genuine business.

Prior to IR35 being introduced, a self-employed worker could provide services to their client as a one-man-band limited company, taking a large percentage of their earnings as dividends and saving on national insurance contributions and tax deductions, with no way for HMRC to challenge the relationship. A worker could leave employment on Friday, set up as a limited company, and return to the same role on Monday working as a limited company. As this represented lost revenue to the exchequer, the government took steps to enable HMRC to challenge whether someone was in fact continuing their previous employment under a different guide (i.e. as a limited company).

The relationship between the worker and end client

At the core of IR35 legislation is the relationship between the worker (you) and the end client. IR35 seeks to create a hypothetical contract between the worker and the end client that would exist if the worker was engaged directly by the end client (i.e. as an employee) rather than through intermediaries (the limited company and agency).

The (contractual) relationship between the end client and the worker can be classified as falling into two categories:

  • A contract for services – a genuine contract for services by a consultant, freelancers or other self-employed person
  • A contract of service (disguised employment) – where a hypothetical contract exists between the worker and the end client

If the engagement is considered ‘disguised employment’ by HMRC, the contractor’s limited company would be liable to pay any unpaid tax and national insurance contributions (not the agency or end client).

What’s the difference between a contract for services and a contract of service?

Unfortunately, there is no clear definition of what constitutes a contract for services (self-employment) or a contract of service (employment) exists. However, the following three elements were identified in the famous ‘Ready Mixed Concrete’ Case from 1968 as being consistent with a contract of service (i.e. being an employee rather than self-employed):

  • Personal service/substitution: the requirement for the worker to perform the services personally (i.e. they cannot send a substitute)
  • Mutuality of obligations: the obligation for the worker to accept work which is offered, and an obligation on the employer to provide work (as well as the employer being able to determine how the employee does the work and prioritise their diary)
  • Control: the employer to retain a right of control over the worker

This is by no means an exhaustive list and other factors present must be consistent with a contract of service (employment), including ownership of assets, financial risk and the opportunity to profit.

Let’s look at each of the three areas in turn.

Personal service/substitution

Where an individual is required to provide the services personally and is not able to send a substitute, this is an indicator of a contract of service (employment). If a substitute can be sent to perform the work, it cannot be a contract of service. However, the right to send a substitute should be absolute and not overly fettered to be effective in demonstrating a lack of personal service; i.e. the client or agency should only be able to refuse a substitute on certain grounds.

One would be looking for a contract to contain:

  • a clear right for the contractor to provide (not ‘offer’) a substitute
  • the client’s grounds for refusal should be limited to a lack of skills, experience and qualification (and perhaps security clearance) and no more
  • the contactor remains in the contractual chain and responsible for the engagement including payment of the substitute
  • the contractor remains responsible for any handover costs – but there should be no requirement for a handover to last for a specific period of time; examples of two-week handover periods being required are nothing more than a barrier to substitution

Mutuality of Obligations

There are two areas to be considered under mutuality of obligations: firstly, whether there is an obligation for one party to offer work, and if offered, whether there is an obligation for the other to accept (often referred to as ongoing mutuality); secondly, whether there is mutuality within the engagement, i.e. whether there is an expectation that the engagement must be seen through to the end by the contractor/service provider.

To fully satisfy the requirement for a lack of mutuality of obligations, it should be clear that a lack of obligations exists not only with regard to ongoing work but also during the contract period.

HMRC’s current opinion is that the provision of services in exchange for payment is sufficient to create mutual obligations between the parties. Whilst we have never shared this view, a lack of mutual obligations is perhaps the hardest area on which to base an argument than an engagement should fall outside IR35.


Where the client retains a right of control over the worker, this is more indicative of a contract of employment. If it can be shown that the client does not have the right to exercise control over the worker, case law dictates that you cannot be an employee. The most important element of control is whether the work provider controls the manner in which the worker performs the services i.e. ‘how’ the services are performed.

HMRC like to argue the importance of the ‘what’, the ‘where’, and the ‘when’, whereas it is only when the contractor has control of these factors, that one would highlight these in an IR35 enquiry. In Primary Path, the judge noted that the contractor had conducted a feasibility study; thereby determining the ‘what’ of the project. Whenever a contractor is working from their own offices, we will demonstrate the contractor’s control over the ‘where’ and ‘when’ as well.

Yet the reality is that many engagements will be projects which the client has determined must be undertaken and for practical reasons can only be undertaken on site and within office hours; however, that is the same for the employee as it is for the independent contractor; what determines whether the contractor is free from client control is whether the contractor is “responsible for the method of the performance of the services”; i.e. how the work is done.

Contracts need to have a clause which is as unambiguous as the italicised wording in the previous paragraph. A clause which offers merely ‘reasonable autonomy’ is simply not good enough to deny the client (or agency) a right of control.


Factors which demonstrate that you are genuinely ‘in business on your own account’ should also be considered. The ownership of significant assets, financial risk and the opportunity to profit are indicators of a contract for services.

Whilst it is preferable to be able to demonstrate a genuine business operation, when determining status, these factors are secondary to the key factors above, but can be used where the three key areas do not provide a conclusive result.

Concerned about your IR35 status?

Contractors, consultants and freelancers operate as limited companies for a multitude of reasons. IR35 is a complex topic, but should HMRC consider your contract to be employment (contract of service) rather than self-employment (a contract for services), your company could be liable to repay an eye-watering sum of tax and national insurance contributions.

Markel Tax, part of Markel, offer comprehensive contract reviews to contractors, consultants and freelancers on whether your engagement could be considered employment (a contract of service) or self-employment (a contract for services). Along with a definitive opinion on your status, a full written report is provided with suggested contract amendments where appropriate. Having worked in the freelance market since IR35 was introduced in 2000, Markel Tax experts are ideally positioned to provide guidance on your status.

To take advantage of an IR35 contract review, visit https://www.markeltax.co.uk/ today.

IR35 contract reviews by Markel Tax