Loading…
Frequently asked questions
The questions readers most commonly ask about this topic. Each answer is reviewed by the UK Tax Drag editorial team against current HMRC, FCA and MoneyHelper guidance.
▸ What is IR35 in plain English?
IR35 is HMRC's rule for spotting "disguised employment" — where a contractor working through their own limited company is doing a job that, in substance, looks like employment. If IR35 applies, the contractor must pay broadly the same tax and NI as an employee. The aim is to stop the tax arbitrage between salary (taxed heavily) and dividends (lower rates plus no NI).
▸ Who decides whether a contract is inside or outside IR35?
For private-sector clients with turnover above £10.2m, balance sheet above £5.1m, or 50+ employees, the END CLIENT decides since April 2021. For smaller private-sector clients, the contractor's own company decides. For public-sector contracts, the end client always decides. The decision is recorded in a "Status Determination Statement" (SDS) that the contractor receives.
▸ What does HMRC look at to decide IR35 status?
Three key tests: (1) Mutuality of obligation — must the client offer work and you accept it? (2) Personal service — must YOU specifically do the work, or could you send a substitute? (3) Control — does the client direct how, when, and where you work? Plus secondary factors: financial risk, equipment provided, integration with the client's team, exclusivity. HMRC's CEST tool gives indicative answers but isn't binding.
▸ What's the financial difference between inside and outside IR35?
On a £500/day rate inside IR35, after employee NI, employer NI, income tax, and the apprenticeship levy, take-home is typically around 50-55% of gross. Outside IR35 (via a personal service company taking a low salary + dividends, with allowable expenses), take-home is typically 70-78%. The difference on £100,000 annual contract value is roughly £15,000-£25,000 — significant.
▸ Can a contract be partly inside and partly outside IR35?
Each contract is assessed independently. You can have multiple contracts where some are inside and some are outside, processed differently for each. But within a single contract, HMRC views the entire arrangement as either inside or outside — there's no "partial" status. If a project changes nature significantly, a fresh status determination may be appropriate.
▸ What happens if HMRC challenges my outside-IR35 status?
HMRC opens an enquiry (typically within 12 months of the relevant Self Assessment return). They review contracts, working practices, communications. If they conclude IR35 applied, they recalculate tax and NI as if you'd been employed, plus interest and penalties. Successful defences typically need documented evidence of substitution rights, lack of MoU, business-on-own-account behaviour. Many contractors carry IR35 insurance for legal defence costs.
How UK Tax Drag holds itself to account
Every page is reviewed against the editorial standards, written from primary sources, sourced openly, and corrected publicly. No affiliate revenue. No sponsored content. No paid placements.