The Ultimate Guide to IR35

Update for 2019: This post is even more relevant if you are an engager of limited company contractors. From April 2020, you will need to make a decision on whether or not IR35 applies and make appropriate deductions from payments to contractors if it does.

IR35 started life as a press release issued in 1999.

The late 90s saw an explosion in the use by companies of a flexible workforce. In IT and media, it was common for freelancers to work through their own personal service company (“PSC”). Under this arrangement, the freelancer would set up a company with themselves as the only director and shareholder. The PSC would then provide services to clients rather than the individual.

This method of working provided a lower marginal tax rate than the pay-as-you-earn system leading to the apocryphal story of a person leaving their job as an employee on Friday and returning as a contractor on the Monday.

The introduction of IR35 changed this position completely.

But, before we get to that, a disclaimer. Although I am a lawyer, this is not legal advice. IR35 assessments are tricky and in the Tax Tribunal, HRMC loses as many cases as it wins. You should always seek independent professional advice on your particular circumstances.

Back to IR35...

IR35 asks the following question:

But for the existence of the PSC, would the individual be the employee of the client?

If the answer to this question is “Yes”, an obligation arises to account to HM Revenue & Customs for PAYE income tax and NICs on the fees earned under the relevant contract.

This removed all benefit to the individual of working through a PSC. It attacked what HMRC saw as a growth in “disguised employment” i.e. companies using contractors to fill roles that should be filled by permanent employees.

What determines employee status?

The IR35 test turns on whether the person performing the work would be an employee of the client if the PSC was removed from the equation. Determining who is, and who is not, an employee has been a topic of legal debate for many years.

The Employment Rights Act 1996 defines an employee as someone who works under a contract of employment. Helpful? Maybe not.

A frequently quoted statement is from the case of Carmichael v. National Power plc where the House of Lords stated that employment must consist of an “irreducible minimum of mutual obligation”.

That is to say that the employer is obliged to provide work and the employee is obliged to perform the work.

The following is a non-exhaustive list of the factors that HMRC will take into consideration when assessing employment status:

  • Do you work set hours, or a given number of hours a week or a month?
  • Do you have to do the work yourself rather than hire someone else to do the work for you?
  • Can someone tell you at any time what to do, when to work or how to do the work?
  • Can you get overtime pay?
  • Do you work at the premises of the person you work for, or at a place or places he or she decides?
  • Do you generally work for one client at a time, rather than having a number of contracts?
  • Do you have the final say in how you do the work for the client?
  • Can you make a loss on the contract?
  • Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?
  • Are you free to hire other people on your own terms to do the work you have taken on?
  • If you are free to hire other people on your own terms, do you pay them out of your own pocket?
  • Do you have to correct unsatisfactory work in your own time and at your own expense?

These factors can be broadly categorised into 4 topics:

Mutuality of Obligation

Do you generally work for one client at a time, rather than having a number of contracts? Are you and the client inextricably bound to each other?

Personal Service

Do you have to do the work yourself rather than hire someone else to do the work for you?


Can someone tell you at any time what to do, when to work or how to do the work?


Can you make a loss on the contract?

In addition to these factors, HMRC will also look at integration into the client’s organisation. Does the individual wear a uniform; are they invited to client events? I recall visiting a client site in Pembroke to talk to six contractors who all attended the meeting wearing client-branded polo shirts.

Not one of these factors is determinative of its own accord. This is a big picture exercise and a pointer to employment on one factor may be countered by a pointer to self-employment on another.

So, how to deal with these matters in practice?

Remember, your business is responsible for the services. You, the individual, are not responsible for the successful performance of the services. In all dealings with your client, you must restate this position and make the relationship clear. Your PSC is a professional organisation engaged to deliver a package of work to your client.

Holding professional indemnity insurance will support the contention that your PSC is responsible for the services.

As a consequence, the client should allow anyone to do the work. It is reasonable and fair for clients to seek assurances that the people you send will be capable and trustworthy. Clients should only veto suggestions on such grounds; they should not have an absolute right of veto.

As a professional services organisation, the client is relying on your company’s skills and expertise to deliver the results they need, and this should form the basis of your contract. Where possible, you should agree a set of deliverables and/or milestones with the client to which you should work. What you need to avoid is having the client dictate in too much detail how your company is to deliver the services. For example, if the client wants to engage you to develop a website, you should be free to choose the language in which the website is written and use your own equipment to do the work.

In the same vein, you should be able to choose where to perform the services. Maybe you want to work from home three days per week, but will come on site twice a week to engage with other stakeholders in the project.

Mutuality of obligation arises where one party is obliged to provide work and the other is obliged to perform the work. It is very difficult to ascertain a tipping point at which this occurs but there are ways to minimise that risk.

Taking breaks from the performance of services for a particular client will assist. If you have agreed to complete the project for a client within a fixed period, you may find that you have spare time during which your PSC can perform services for other client. Having many clients is a perfect way to avoid an implication of mutuality of obligation and to prove that your PSC is its own business and you are not in disguised employment.

As an employee, the greatest risk you face is being fired for not doing your job properly. Your salary is never at risk. Your employer cannot refuse to pay you because they didn’t think the work was up to scratch. When pricing your contracts, consider making part of the fees subject to service level achievement. Or, offer a limited warranty on your work such that you will re-perform defective work at no cost.

Top Tips

Include a right of substitution within the contract. It doesn’t need to be an absolute right - some level of veto by the client on reasonable grounds should be OK. If the right is actually exercised in practice this will help to show that there is no requirement of personal service.

The PSC should be subject to as little control as possible. For example, the contract should permit work to be performed from a separate office and during such hours as the PSC sees fit. If possible, ensure your PSC can use its own equipment, rather than the client providing equipment for you to use.

Contracts should, if possible, be for a project or piece of work. Similarly, payment should be structured by reference to achievement of milestones. Maintaining insurance also shows the assumption of risk by your PSC.

Avoid integration into the client company. Don’t wear uniforms and try to ensure you can be distinguished from employees. Don’t participate in employee benefit schemes or events.

Dealing with employment businesses

Entering into a contract with an employment business presents its own set of challenges. There are two main reasons for this:

  • Employment businesses enter into contracts with 1000s of contractors every year and do not have the resources to negotiate specific terms with each contractor. For this reason, they have standard contracts that they wish to apply across the board.

  • Employment businesses may have agreed specific contracts with their clients that cannot be amended. Agreeing to amendments requested by contractors would create a conflict between the two sets of terms.

Most employment businesses have objections in principle to requests for amendments being framed as “IR35 requests”, particularly where they do not reflect the true position. These objections have been bolstered by the Criminal Finances Act 2017. This legislation puts organisations at risk if they facilitate tax avoidance.

Further, emails requesting amendments for IR35 purposes are disclosable by the employment business in the event of an HMRC investigation.

Most clients will not be aware of IR35; particularly at the line manager level where you may interview. Explain to them the challenges you face and see if they can accommodate requests to lessen the IR35 impact.

Where you are working through an employment business and the client agrees to your requests (e.g. allowing you to work from home) make sure this agreement is conveyed to your consultant so your contract reflects the true position.

There is nothing fundamentally wrong with working for one client for an extended period of time. The problem arises where your PSC does not provide services to any other clients during that period. Dedicating the provision of your PSC's services to one client for 2 years is asking for trouble.


Due to the limited resources of HM Revenue & Customs, it will generally only be the most serious failures that will draw their attention.

It's important to note that the contract wording will not be of help unless it genuinely reflects the actual working practice. HMRC will "go behind" the contract to look at whether or not the client was in fact controlling the work; or whether the contractor did in fact use their own equipment.

For these reasons, HMRC have introduced rules relating to off-payroll working in the public sector. Under these rules, the organisation paying the PSC has to determine if IR35 applies. If it does, the fee-payer has to deduct tax and national insurance.

It is likely that these rules will be extended to the private sector. If this happens, the proper negotiation with the client of working practices will be critical.

Precedent Clauses

The following precedent clauses reflect an ideal working arrangement with your client. As noted above, HMRC will look behind the contract at the working practice so these clauses should only be used where they accurately reflect the true working situation.

These clauses can be used as the basis of a discussion with your client about the issues facing you under IR35.

The definitions used in the sample clauses below should be adapted to reflect the definitions used in the proposed contract.

Company: The client/employment business.

Contractor: The limited company who will hold the contract i.e. the PSC.

Personnel: The individual supplied by the Contractor to perform the Services.

Substitute: An alternative individual proposed by the Contractor to perform the Services.

Services: The work and other services performed for the client.

“The Contractor is responsible for maintaining reasonable continuity in Personnel providing Services on its behalf, but reserves the right to make changes from time to time. No additional charge will be made for any handover period, and the Contractor remains responsible for all Services performed on its behalf. It is the Contractor’s responsibility to ensure that the relevant skills and experience of any Substitute remain commensurate with the Services to be provided and the needs of the Client. The Contractor will provide details of any Substitute to the Client in advance, and Services will not be provided by any individual whom the Client reasonably considers lacks the necessary skills and experience.”

“The Services shall be performed at or from the location as specified in the assignment schedule, or at such other agreed site provided advance notice is given by the Contractor to the Client.”

“The Contractor shall be responsible for correcting any defective Services at its own cost and in its own time, provided that such defects are notified to the Contractor by the Client within one month after the Services are otherwise complete. It is the Client’s responsibility to afford the Contractor reasonable opportunity to so rectify any defective Services.”

“As an independent professional firm, the Contractor will not be subject to direction or control by the Client (other than where necessary to comply with Client rules or regulations), and itself accepts the responsibility for the proper provision of Services.”

“The Client has no obligation to engage the Contractor for any further assignments, nor is the Contractor under any obligation to offer to provide any further services.”

“For the avoidance of doubt these terms shall not be construed as a contract with any Personnel supplied or any representative of the Contractor, and any of the liabilities of an employer arising out of the assignment shall be the liabilities of the Contractor.”