IR35 questions — answered plainly

What is IR35?

IR35 is HMRC's test for whether you are a disguised employee. If you are inside IR35, you pay Income Tax and National Insurance as if you were employed — costing you £8,000–£12,000 a year more than an outside IR35 contractor on the same contract. IR35 (officially the off-payroll working rules) applies to contractors operating through a limited company where HMRC considers the working arrangement to be employment in disguise.

Am I inside or outside IR35?

How much does being inside IR35 cost me?

The difference is typically £8,000–£12,000 per year. The exact amount depends on personal allowances, pension contributions, and other deductions.

What is the substitution test?

The right to substitute is your single strongest defence against IR35. If your contract gives you a genuine right to send someone else to do the work — and the client cannot insist on your personal service — this alone can point clearly to outside IR35. The substitution does not need to have actually occurred; the right to substitute is what matters. A client who would reject any substitute and requires you personally is a significant inside IR35 risk factor.

What is mutuality of obligation (MOO)?

MOO is the IR35 test that HMRC's own CEST tool ignores — which is why many specialists consider CEST an incomplete IR35 assessment. Mutuality of obligation asks whether the client is obliged to keep offering you work and whether you are obliged to keep accepting it. In a genuine contractor relationship, you are engaged for a specific project with a defined scope and end date — no expectation of ongoing work beyond that. An open-ended arrangement where both sides assume continuity is a MOO risk factor pointing inside IR35.

What is the control test?

The control test assesses who controls how you do your work. Outside IR35: the client specifies what to deliver, not how to deliver it — you control your own methods, hours, and location. Inside IR35: the client dictates when to start, where to sit, what tools to use, and how to approach each task, as an employer would. Genuine contractors are engaged for a result, not managed like staff.

Who decides my IR35 status?

*Small = meets 2 of: under £10.2m turnover, under £5.1m balance sheet, fewer than 50 employees.

What is a Status Determination Statement (SDS)?

An SDS is a written document that medium and large clients must provide to contractors, stating whether the engagement is inside or outside IR35 and the reasons for that decision. Required since April 2021. Always request an SDS in writing from any medium or large client and keep it on file — it is your primary evidence of IR35 status if HMRC challenges you later.

What is HMRC's CEST tool — and should I use it?

CEST (Check Employment Status for Tax) is HMRC's free online IR35 assessment tool. HMRC will stand behind a CEST result if the information entered is accurate and the working arrangements do not change. However, CEST does not test for Mutuality of Obligation — widely considered a critical IR35 factor. Use CEST as a starting point only. An independent IR35 contract review from a specialist (typically £100–£300) provides stronger protection and considers all relevant factors.

What triggers an HMRC IR35 investigation?

Can I still use a limited company if I am inside IR35?

Yes. You can continue to operate a limited company even if a specific engagement is inside IR35. However, income from that contract must be processed through PAYE — either by the client or via an umbrella company — and your limited company receives the net amount after deductions. You can simultaneously take other outside-IR35 contracts through your limited company. Note: the 5% allowance for limited company admin costs on inside-IR35 work was abolished from April 2023.

What expenses can I claim if I am inside IR35?

Inside IR35, your expense claims are more restricted. You can claim expenses an employee would be entitled to — travel to temporary workplaces (not a permanent client office), professional subscriptions, and some equipment costs. You cannot claim the full range of limited company expenses available to outside-IR35 contractors such as home office costs and training. The 5% general allowance for admin costs was also removed from April 2023.

How do I protect myself from an IR35 investigation?

How do I check my IR35 status before signing a contract?

What happens during an HMRC IR35 investigation?

An HMRC IR35 investigation typically begins with a compliance check letter asking you to provide information about a specific contract. HMRC will request your contract, working practices documentation, and evidence of your business operations — equipment you provide, other clients you work for, how you invoice. The investigation can cover the current tax year and up to six prior years if HMRC suspects deliberate non-compliance. The process typically takes 12–24 months. During this time you should respond through your accountant or tax adviser — never directly to HMRC without professional support. If the investigation finds you were inside IR35, HMRC will raise an assessment for unpaid Income Tax and NI, plus interest and potentially penalties. IR35 investigation insurance covers the cost of professional representation.

What records should I keep to defend an IR35 investigation?

Keep the following for every contract, for at least six years: the signed contract itself, all amendments and extensions, any Status Determination Statement issued by the client, evidence of actual working practices (timesheets showing variable hours, emails showing you controlled your own methods, evidence of working from your own premises), evidence of financial risk (your own equipment, professional insurance premiums, any unrecovered costs), evidence of other clients worked for simultaneously, and all invoices raised. Working practices are often more important than the contract wording — HMRC looks at what actually happened, not just what the contract says. A contract that says "right of substitution" but where you never varied your hours or worked for anyone else is weak protection.

Can I appeal an inside IR35 determination?

Yes — in two ways. First, if a medium or large client issues an inside IR35 Status Determination Statement (SDS), you have the right to formally disagree through the client-led disagreement process. The client must consider your representations and respond within 45 days. If they maintain the inside determination, you can escalate to HMRC. Second, if HMRC raises an IR35 assessment directly, you can appeal through the tribunal system — First-tier Tax Tribunal, and if necessary the Upper Tribunal. Appeals are time-consuming and expensive without specialist representation. IR35 investigation insurance typically covers tribunal costs. The strongest appeals are those with solid contemporaneous working practice records — not just a well-worded contract.

What is an IR35 contract review and what does it cost?

An IR35 contract review is a professional assessment of your contract and working practices by a specialist IR35 adviser or employment law solicitor. They review the contract wording against the three key tests (substitution, control, MOO), identify risk factors, and recommend amendments to strengthen your outside IR35 position. A written review typically costs £100–£350 per contract. Some providers offer ongoing cover — an annual subscription that includes reviews for every new contract plus investigation insurance if HMRC challenges your status. Known providers include Qdos, Kingsbridge, and specialist IR35 law firms. Your contractor accountant should be able to give an initial view, but a formal written review from a specialist carries more weight with HMRC than an accountant's opinion alone.

What if my agency or client gives everyone a blanket inside IR35 determination?

Blanket determinations — where a client or agency declares all contractors inside IR35 without individual assessment — are not legally compliant. HMRC's guidance requires clients to make individual assessments for each engagement. If you receive a blanket determination, you have the right to formally challenge it through the client-led disagreement process. However, in practice many contractors face a stark choice: accept the determination and work inside IR35 (often through an umbrella company), negotiate new commercial terms that reflect the inside IR35 cost, or walk away. If you decide to work inside IR35 through an umbrella, ensure the umbrella is FCSA-accredited — non-compliant umbrella companies can expose you to additional tax risk. The blanket inside determination from major banks and public sector clients since 2021 has pushed many contractors into umbrella arrangements — your day rate negotiation should account for the additional tax cost.