IR35 Explained: Is Your Contractor Really Self-Employed?

Getting employment status wrong is an expensive mistake. IR35 decides whether your contractor is genuinely in business on their own account — and the contract is only part of the answer.

What is IR35?

IR35, also called the off-payroll working rules, is tax legislation designed to catch 'disguised employees' — people who work like employees but bill through their own company to reduce tax. If IR35 applies, broadly the same tax and National Insurance is due as for an employee.

The three key tests

Control

How much say does the client have over what the contractor does, how, when and where? The more control, the more it looks like employment.

Substitution

Can the contractor send a substitute to do the work? A genuine, unfettered right of substitution points strongly towards self-employment.

Mutuality of obligation

Is the client obliged to offer work and the contractor obliged to accept it? Ongoing mutual obligation suggests employment rather than a one-off engagement.

Who decides status?

For work in the private sector, medium and large clients are responsible for determining a contractor's status. Small clients are generally exempt, leaving the contractor's own company responsible. Public sector clients always determine status.

How to protect your business

• Use a properly drafted contractor or consultancy agreement
• Make sure the working reality reflects genuine independence
• Include a real right of substitution where appropriate
• Avoid treating contractors like employees in practice
• Keep status determinations and your reasoning on file