by Steffen Kemmerzehl, MAAT, AATQB – see The Accounting Hub
Many UK contractors operate through a limited company without fully understanding how IR35 works or why it matters.
A software developer working remotely for a large pharmaceutical company. An engineering contractor on a long term project. An IT consultant billing through their own company while working mainly for one client.
These arrangements are common across the UK, but they can create important tax risks if IR35 is ignored.
IR35, also known as the off payroll working rules, is designed to identify situations where somebody works like an employee while being paid through a limited company.
If HMRC believes a contractor is effectively acting as an employee, they may decide the contract falls “inside IR35”. This can result in Income Tax and National Insurance being charged in a similar way to normal employment.
If the contract is considered “outside IR35”, the contractor is generally treated as genuinely self employed and operating as an independent business.
The rules can become complicated because HMRC does not only look at the written contract. They also look at the actual working relationship between the contractor and the client.
For example, a contractor working fixed hours under close supervision using the client’s equipment may face a higher IR35 risk. A contractor managing their own schedule, working on defined projects, and providing services independently may have a stronger outside IR35 position.
Even simple situations can become unclear.
A contractor may have a well written agreement stating they are independent, but their day to day working arrangements may look very similar to employment. Another contractor may assume they are automatically outside IR35 because they operate through a limited company, which is not always correct.
Why IR35 Matters More Today
In recent years, HMRC has increased focus on off payroll working compliance.
Changes introduced in the private sector shifted responsibility for IR35 decisions onto many medium and large businesses. As a result, more contractors are now receiving formal status determinations from clients before starting work.
Many businesses have also become more cautious about contractor arrangements because incorrect IR35 decisions can lead to significant tax liabilities.
For contractors, this means it is more important than ever to understand how contracts are structured and how working practices are viewed by HMRC.
Common Factors HMRC Looks At by IR35
Some of the main areas considered during an IR35 review include:
Control
How much control does the client have over when, where, and how the work is completed?
The more independence a contractor has, the stronger the argument that they are genuinely self employed.
Substitution
Can the contractor send somebody else to complete the work?
A genuine right of substitution can help support an outside IR35 position if it exists in practice and not only on paper.
Financial Risk
Independent businesses normally take on some financial risk.
Contractors using their own equipment, correcting mistakes at their own cost, or working with multiple clients may appear more independent.
Integration Into the Business
HMRC may also consider whether the contractor appears to be part of the client’s organisation.
For example, attending staff meetings, managing employees, or receiving employee style benefits may increase IR35 risk.
A Simple IR35 Example
Imagine two contractors working in similar IT roles.
Contractor One
Works only for one company for several years
Follows fixed office hours
Uses company equipment
Requires permission for time off
This arrangement may appear similar to employment and could fall inside IR35.
Contractor Two
Works on specific projects
Controls how the work is delivered
Uses their own equipment
Provides services to multiple clients
This arrangement may support an outside IR35 position.
The outcome always depends on the specific contract and actual working practices.
Keeping Things Simple
At Friendly Assist Accountancy, we help contractors and limited company directors understand IR35 in a practical and straightforward way.
We review contracts, explain potential risks clearly, and help clients structure their business arrangements more confidently.
Many contractors assume IR35 only becomes relevant during a HMRC investigation. In reality, understanding these rules early can help prevent expensive mistakes later on.
Clear contracts, organised records, and professional advice can make a significant difference.
Useful Resources to IR35
HMRC IR35 Guidance
HMRC Off Payroll Working Rules
HMRC CEST Tool
IPSE IR35 Guide
ACCA IR35 Overview
CIOT IR35 Guidance
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