Navigating IR35: A Guide for Contractors and Businesses

The term “IR35” can cause confusion for both independent contractors and the businesses that hire them. Understanding the rules is crucial for ensuring compliance and avoiding potential tax liabilities. This post explains the key criteria that determine whether a contract falls “outside IR35” from both perspectives.

What Does “Outside IR35” Mean?

If a contract is “outside IR35,” it means the contractor is genuinely self-employed for tax purposes. The contractor’s limited company can receive gross payments, and the contractor is responsible for their own taxes. For the client, it means they are engaging a legitimate business and do not have to deduct PAYE and National Insurance Contributions (NICs) from the contractor’s fees.

The Key Tests of Employment

Three key principles, established by case law, are used to determine employment status for tax purposes :

•Control: This concerns the degree of control the client has over the contractor. A genuine contractor will have significant say in how, what, when, and where they perform their work. If the client dictates working hours, methods, and locations, it points towards an employer-employee relationship.

•Right of Substitution: A key indicator of self-employment is the right for the contractor to send a substitute to perform the work in their place. If the contract requires the personal service of the individual and they cannot send a replacement, this suggests an employment relationship .

•Mutuality of Obligation (MOO): This refers to the obligation for the employer to offer work and the employee to accept it. In a genuine business-to-business relationship, there is no obligation for the client to provide ongoing work, nor for the contractor to accept it once the current project is complete .

Who Decides? The Off-Payroll Working Rules

Since April 2021, the responsibility for determining IR35 status for engagements with medium and large-sized private sector clients, and all public sector clients, falls on the client. The client must provide a “Status Determination Statement” (SDS) to the contractor, outlining their decision and the reasons for it. For small private sector clients, the responsibility remains with the contractor’s intermediary .

Staying Compliant

For contractors, it is vital to ensure your contracts and working practices reflect a genuine business-to-business relationship. For businesses, it is essential to make accurate status determinations to avoid being held liable for unpaid taxes and penalties.

If you have questions about IR35 or need assistance with status determinations, you can contact Lacey Accounting for guidance.

References

[1] GOV.UK. (2026). Check employment status for tax. Retrieved from

[2] GOV.UK. (2026 ). ESM0530 – Guide to determining status: Personal Service. Retrieved from

[3] GOV.UK. (2026 ). ESM0543 – Guide to determining status: mutuality of obligation. Retrieved from

[4] GOV.UK. (2026 ). Understanding off-payroll working (IR35). Retrieved from