IR35 is one of the most complicated and misunderstood parts of UK consultant contracts. It's a tax rule that determines whether you're genuinely self-employed or whether you should be taxed as if you were an employee. Getting it wrong costs money — sometimes a lot of money.
This guide walks through what IR35 actually is, how it affects consultant contracts, and what contract terms matter.
What is IR35?
IR35 stands for the Intermediaries Legislation rule. It was introduced in 2000 to prevent tax avoidance. The idea: some people were setting up personal services companies (PSCs) to provide their labor to clients who would normally employ them. By working through a PSC, they could take advantage of lower corporation tax rates and avoid employer national insurance contributions.
HMRC didn't like this, so IR35 says: if you work through a PSC but are actually employed in all but name, HMRC will treat you as an employee for tax purposes. You'll owe income tax, national insurance, and potentially penalties.
The rule applies to most UK consultancy arrangements. You're most likely to be caught by IR35 if:
You work for one client for extended periods. You work under the client's direction or control. You work similar hours to permanent employees. You're integrated into the client's team. You use the client's systems, premises, and equipment. You can't hire a substitute.
If most of these apply, you're inside IR35, meaning you should be taxed as an employee.
Inside vs. outside IR35
Outside IR35. You're genuinely self-employed. You work for multiple clients or have significant control over how you work. You're responsible for your own work and results. The client can't dictate how you work; they contract for an outcome. You can provide a substitute. You take commercial risk (you don't get paid if the work isn't done).
If you're outside IR35, you pay income tax on your profit (not salary) and national insurance at the self-employed rate. You can claim business expenses. This is usually more tax-efficient than employment.
Inside IR35. You're working as if you're an employee, but through a PSC. The client controls how, when, and where you work. You work full-time or near full-time for one client. You're part of the client's team. You can't substitute.
If you're inside IR35, you're taxed as an employee would be. Your PSC is charged tax on deemed salary, and you pay income tax and national insurance. This is less tax-efficient than genuine self-employment.
Who determines whether you're inside or outside?
The client determines your status under current UK rules (as of 2024). The client must assess whether the engagement is inside or outside IR35 and tell you. You should challenge this if it's clearly wrong.
HMRC can override this assessment. If HMRC later decides you're inside IR35 when the client said you were outside, the client is liable for unpaid tax. This incentivizes clients to be conservative in their assessments.
The test is based on the actual working relationship, not what the contract says. A contract can say you're self-employed, but if the facts show you work like an employee, IR35 applies. So the contract matters less than the reality of how you work.
Contract clauses that affect IR35 status
While the contract isn't everything, certain clauses affect whether you're inside or outside IR35:
Substitution rights. Can you send someone else to do the work if you're not available? If yes, that supports "outside IR35" status. If no, it supports "inside IR35." Look for: "You may provide a qualified substitute at no additional cost if you are unavailable."
Control of work. Does the client direct how you do the work, or do they just specify the outcome? Client control supports "inside IR35." Look for language about independence: "You have sole discretion over how to deliver the objectives, provided outcomes meet the specification."
Hours and flexibility. Are you required to work specific hours or be available during office hours? Required office hours support "inside IR35." Flexibility supports "outside." Look for: "You must be available 9-5 Monday to Friday" (inside) vs. "You can manage your hours, provided deliverables are met on schedule" (outside).
Notice and termination. How long is the notice period? Short notice (e.g., 1 week) supports "inside IR35" because it looks like employment. Longer notice (30 days or a project-based end date) supports "outside." Look for explicit termination: "This engagement ends on [date]. Either party may terminate with 30 days' notice."
Duration and exclusivity. If the contract requires you to work exclusively for one client for an indefinite period, that supports "inside IR35." If it's for a defined project and allows you to work for others, that supports "outside."
Risk and liability. Who bears financial risk? If you receive payment regardless of results, that supports "inside IR35." If you only get paid for results delivered, that supports "outside."
What contract terms to negotiate if you want to stay outside IR35
If being outside IR35 matters to you (and it usually does), negotiate for contract terms that support that status:
Explicit right to substitute. "The consultant may, with reasonable notice, provide a qualified substitute to perform services if unavailable."
Project-based or fixed-term. "This engagement is for the [specific project] with an expected end date of [date]. The engagement may be extended by mutual agreement."
Independence. "The consultant has sole discretion over the methods and hours of work, provided deliverables are met on the specified dates."
No exclusive engagement. "The consultant may accept other work, provided it doesn't conflict with obligations under this agreement."
Reasonable notice period. "Either party may terminate with 30 days' notice" (not 1 week).
Practical advice
Get a professional IR35 assessment. Before you sign a consultancy contract where IR35 status is unclear, get advice from an accountant or tax specialist. They can assess whether you're likely to be inside or outside and what that costs you in tax.
Don't just trust what the client says. The client has to assess and declare your IR35 status. But HMRC can challenge it. If you disagree with the client's assessment, say so and ask them to reconsider.
Document the reality, not just the contract. IR35 is based on how you actually work, not what the contract says. So if the contract says you can substitute but the client won't allow it, the reality matters more. Keep records of your working arrangement.
Consider requesting an HMRC ruling. If a contract is complex and you want certainty on IR35 status, you can ask HMRC for a formal ruling called a "Contractual Status Agreement (CSA)." This takes time but gives certainty.
Getting clarity on your contract
Before you commit to a long-term consultancy contract, make sure you understand the IR35 implications and whether the contract terms support your preferred tax status. Use QuickLegalCheck to review the contract and flag clauses that affect IR35 status.
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