IR35 is a piece of tax legislation that frequently arises in conversations about engaging contractors, yet its details are poorly understood by many founders — and the consequences of getting it wrong, particularly for medium and large businesses, can be significant. Understanding what IR35 is and when it applies is an important part of managing a workforce that includes contractors operating through their own companies.
IR35 is an anti-avoidance tax rule designed to ensure that contractors who work in a way functionally equivalent to employment pay broadly the same tax and National Insurance as employees, even if engaged through their own limited company. Whether IR35 applies to a specific engagement is determined by the nature of the working relationship, not the structure of the contract. HMRC uses factors including control, substitution, and mutuality of obligation to assess the true status of a working arrangement.
The responsibility for determining whether IR35 applies sits with the engaging business for most medium and large private sector companies, following reforms to off-payroll working rules. For small businesses, responsibility remains with the contractor's own company. Determining IR35 status incorrectly can create significant tax liability. Our guide to IR35 for UK businesses covers how the rules work and what engaging businesses need to assess.