IR35 & Related issues

This Content Was Last Updated on March 25, 2024 by Jessica Garbett



IR35 is the name given to a set of anti avoidance tax provisions relevant to anyone working via a Personal Service Company (PSC).

As this guide will show, there are a number of complexities around IR35, but with care and advice it can be navigated.

This guide is part of a series. This is the index:




IR35 Basics

IR35 was announced in the 1999 budget, it was Inland Revenue Announcement 35 – hence IR35.  It came into effect from April 2000.

The aim was to counter perceived avoidance with the use of PSCs around “Disguised Employment” and “Friday to Monday” shifts

  • Disguised Employment – a situation where but for the imposition of a PSC or agent, the relationship between the client and worker would be one of employment
  • Friday to Monday – the idea that someone could work for a client as an employee until Friday and come back on Monday doing the same role but via a company

In reality Friday to Monday was a convenient sound bite – the concern was about disguised employment in general.

The IR35 proposals settled down to importing the existing Employment Status tests into company relationships.  Previously Employment Status had only been an issue for individuals providing services as Sole Traders.

However this proved difficult for HMRC to police, and many feel that the Employment Status tests are not suited to knowledge businesses having developed conceptuality to deal with status issues in manual occupations.


Original IR35

At its simplest IR35 required consideration of the “Hypothetical Contract” which would have existed between the worker and the client.  This is “hypothetical” as clearly it doesn’t exist, so it needs to be construed from evidence about working practices.  If this showed employment, then the workers PSC was required to operate IR35 – eg:

  • Actual contractual chain is
    • Worker > PSC > Agent > Client for agency contracts
    • Worker > PSC > Client for direct contracts
  • IR35 required consideration of what a “hypothetical contract” directly between Worker and Client may have been
  • It the hypothetical contract showed employment then the PSC must operate IR35 on amounts received from Agent (net of vat)
  • If the hypothetical contract showed self employment then the PSC needs do nothing else
  • Responsibility for operating IR35 sat with the PSC (or more correctly its Worker as Director of the PSC) – this changed from 2017 in the Public Sector and 2021 in the Private Sector

Where the hypothetical contract showed the engagement caught by IR35 (“IR35 fail”) then the PSC had to apply IR35 to the payments from the Agent or Client.   This meant treating 95% of these, after deduction of some tightly defined expenses, as a gross salary including Employers NI – this amount was then grossed down for Employers NI and treated as a “deemed” salary subject to Income Tax and NI under PAYE, which meant the PSC was bearing the cost of Employers NI, Employees NI and Income Tax.

At its simplest this denied the Worker and their PSC the benefit of a traditional low salary / high dividend mix, and increased their overall tax bill.


IR35 Reform – Reverse IR35

This position rolled on until 2017 with HMRC and PSC users having many Court skirmishes.  It was agreed by almost all that the system was idiosyncratic and unpredictable.

April 2017 saw the first step of IR35 reform.  Initially this applied to contracts where the Client was a Public Sector body, and created a reverse IR35 where the client or agent is responsible for status determination and operation of IR35, eg:

  • Actual contractual chain is
    • Worker > PSC > Agent > Client for agency contracts
    • Worker > PSC > Client for direct contracts
  • IR35 required consideration of what a “hypothetical contract” directly between Worker and Client may have been
  • It the hypothetical contract showed employment then the Agent, or Client if no Agent, must operate PAYE on the contract amount (net of vat)
  • If the hypothetical contract showed self employment then the Agent / Client had to take no further action
  • Responsibility for operating IR35 sits with the party in the chain immediately above the PSC, eg:
    • If chain was Worker > PSC > Client – responsibility with Client
    • If chain was Worker > PSC > Agent > Client – responsibility with Agent
    • If chain was Worker > PSC > Agent#1 > Agent#2 > Client – responsibility with Agent#1
  • PSC gets an offset for tax deducted at source

Compared to the Original IR35 rules:

  • Client responsible for status determination
  • Client or agent responsible for deducting PAYE

One effect of IR35 reform is that the Employers NI needed to be funded by the Client or Agent rather than the PSC -i n reality most Clients will simply decrease the headline rate to fund this, which means the Worker ultimately bears the amount, albeit though market forces, in the long term, may shift this burden to the Client if the reduction in headline rate causes recruitment problems.

A couple of extra points to note here:

  • VAT is outside of the IR35 regime – it is paid without deduction via the contractual chain to the PSC
  • Although under the 2017 reforms Clients or Agents had to operate PAYE on the payments to the PSC, alas there were no pension or employment protection rights

The next step in IR35 reform was April 2021 – at that stage the Public Sector reverse IR35 apply to Private Sector contracts – unless the Client is a small company (Broadly, turnover under £10.2m) – Private Sector reverse IR35 will work exactly as for Public Sector engagements.

Here’s a quick summary of how original IR35 and reverse IR35 look:

Original IR35 Rules
Public and Private Sector Contracts (pre April 2017 and April 2021 respectively)
Private Sector Contracts with clients who are small companies ongoing
Reverse IR35
Public Sector Contracts post April 2017
Contracts with Large/medium Private Sector Clients post April 2021
Responsibility for Status Decisions PSC Client (also known as “engager”)
Responsibility for making deductions on contracts inside IR35 PSC Person paying the PSC – Agent, or Engager / Client if no agent
Tax and Employees NI borne by PSC PSC
Employers NI borne by PSC Person paying the PSC – Agent, or Engager / Client if no agent However be aware that rates may be lowered at renewal / contract offer to reflect this.
5% expense deduction Allowed Not Allowed
Employment protection None None
Tax risk if IR35 reviewed by HMRC PSC Engager / Client (but be aware of tax clawback clauses in contracts)
SSP/SMP and similar PSC PSC
Travel expense deduction None on inside IR35 engagements; can be claimed under normal rules on outside IR35 engagements. None


Case Studies

To understand this in financial terms visit the Case Studies Section of our page Tax and VAT for a PSC

Definitions and Terms

Consider the following – Pat works through a company called PatCo Limited.  PatCo contracts to MegaCompany PLC via ExpressAgency Limited for Pat to update MegaCompany’s IT systems.

Contractual chain is Pay > PatCo Limited > ExpressAgency Limited > MegaCo PLC

  • Worker – the individual carrying out work – in this case Pat (may be called individual or contractor)
  • PSC (Personal Service Company) – the company the Worker uses, in this case PatCo Limited
  • Client – the business or entity that Pat is working for – in this case MegaCompany PLC  (may also be called Engager)
  • Agent – a business who link Clients and Workers together, in this case ExpressAgency Limited (may be called Employment Business)
  • Engagement – the arrangement for PatCo Limited to work for MegaCompany PLC  (sometimes called the Contract)
  • Intermediary – any entity in the chain between Pat and MegaCompany PLC – so includes PatCo Limited and ExpressAgency  (may be called Employment Intermediary)
  • Intermediaries Legislation – the formal name for IR35
  • Hypothetical Contract – the contract that would exist hypothetically if Pat worked directly for MegaCompany PLC (maybe called Deemed Contract, Notional Contract)
  • Employment Status Tests – the tests used to determine if an Engagement is Employment or Self Employment.
  • Disguised Employment – the situation that exists if the Hypothetical Contact shows Employment
  • Deemed Payment – the notional amount of salary to which PAYE is applied to if an Engagement is caught by IR35.
    • For Public Sector contracts and most Private Sector contracts this will be the ex vat payment to the PSC
    • For contracts with small Private Sector clients it will be the 95% of the ex vat payment to the PSC grossed down for Employers NI


Scope of IR35

The scope of IR35 can cause confusion.  Here are a few pointers:

IR35 generally only applies to contracts via a Personal Service Company (in some limited circumstances, contracts via a partnership).

It never applies to contracts directly between a Worker and an Agent / Client – here the choices are Self Employment or Employment depending on facts –  we mention this, as some Clients confuse the situation by suggesting IR35 applies in some way to contracts with Sole Traders – it doesn’t, although Employment Status does.

IR35 is not restricted to:

  • Any particular sector, eg IT, construction or engineering
  • Any particular services
  • Any specified length or value of contract

In principle IR35 can apply whatever the sector, services, length or value of contract

There will be some situations where the engagement is self evidently outside of IR35 as there is no hint of disguised employment, for example:

  • Short one off tasks for businesses
  • Work done directly for the public
  • Engagements where significant materials are supplied
  • Situations where the worker has a significant business structure with other staff members, premises, infrastructure

There are no formal disregard rules here – it is just self evident that the Status Tests will fail.


Status Tests

The Main Status Tests

IR35 works by overlaying the existing Employment Status tests into Engagements via a PSC.  The Status Tests apply primarily to questions of Employment v Self Employment where an individual is providing services as a Sole Trader – are they Self Employed or Employed? – IR35 piggy backed these rules.

There are no statutory tests as to whether a worker is employed or self employed, but over the years the courts have refined a series of rules known as the Status Tests.  The Status Tests are used to reach a conclusion about employed v self employed status; no one test is determinative in its own right, but some are more important that others – the first three below – Mutual Obligations, Personal Service and Control are considered the most important – if any one of them is genuinely absent from a purported employment relationship, then the relationship must be one of self employment.

  • Mutuality of obligations – Mutuality of obligations points towards employment, i.e. the engager is obliged to offer the worker work and the worker is obliged to accept it – non mutuality points towards self employment.  Mutuality can occur by custom and practice rather than an express contract.
  • Personal service obligations – An obligation to work personally is indicative of employment whereas freedom for the individual to delegate, substitute and sub-contract is indicative of self employment).  Contracts of employment do not have rights of delegation, substitution or sub-contract, collectively known as non-personal services rights.  Where these rights are included in the contract then it is a strong indicator of self employment.  A comparatively recent Court of Appeal judgement, Express & Echo Publications v Tanton (1999), held that where a contract allowed services to be carried out by someone other than the worker then it was a contract for services (i.e. self employment) rather than a contract of service (i.e. employment).   However the case law also recognises that where the non personal service rights are a side issue, then they do not carry much weight, eg MacFarlane v Glasgow City Council 2001.  Therefore if you are trying to prove self employed status, the non personal service rights must be wide ranging; it is acceptable for any proposed substitute or delegate to be approved by the engager, but they must actually be paid by the worker providing them.
  • Control – If the worker is subject to detailed control as to how the work is carried out then this points towards employment – if there is merely measurement against agreed outcomes/deliverables and the worker can undertake the detail of the work in their own manner then this points towards self employment.

Also of persuasive relevance:

  • Integration – if the Worker is integrated into the Engager’s organisation then that indicates employment – no integration indicates self employment.  Integration in this context could be work as part of a team, inclusion by name on the employers stationary or promotional literature, being on call rotas, inclusion in internal directories, ability to represent the engager to outside parties.
  • Method of payment – if the Worker is paid by the hour/day/week then that points to employment – being paid for a project or task points towards self employment.  Equally the use of time sheet to record hours points towards employment.
  • Working hours – if the Worker is contracted to work set hours then that points to employment – if the Worker is contracted by reference to outcomes/deliverables then that points to self employment.
  • Simultaneous contracts – if the worker has only one customer/engager then that points towards employment – if the worker has a number of customers/engagers, and even better if they overlap, then this points towards self employment.
  • Risk – little or no commercial risk taken indicates employment – risk indicates self employment.  Risks could be responsibility for rectification of errors and mistakes or financial risk of a project overrun.
  • Responsibility for losses as well as profits – if the Worker is isolated against losses then that points towards employment – if there is a risk of losses then that points towards self employment.  Of course with a labour only service, making a loss is difficult, but the general flavour of the contract must be for risk to sit with the Worker.
  • Provision of equipment – if the Engagers equipment is used then that points towards employment – if the equipment is the Workers then that points towards self employment.  Obviously it is not practical for some very small businesses to provide large items, but PCs for working at home, hand tools, etc, point towards self employment.
  • Bearing cost of correcting defective work and errors – if the Worker does not bear the risks of correcting defective work and errors then this indicates employment – if the Worker does bear this risk, eg by having to carry out remedial work in unpaid time or as part of a fixed price/outcome contract, then that is an indicator of self employment.
  • Freedom to choose where and when the work is carried out – being tied to the Engagers site and working hours indicates employment – the ability to work at home, or to set ones own hours, self employment.

By themselves none of these persuasive points are decisive, but taken together they help to paint a picture.

To re-emphasise the important factors are:

  • Personal service
  • Control
  • Mutuality of obligations
  • These are exactly the same rules as have applied over many years for Employed v Self Employed – IR35 imports them into company situations.

HMRC would also place importance on “Supervision, Direction and Control” separately to the above, but to date the courts have not placed the same importance on this.

In Spring 2017 HMRC introduced an Employment Status Indicator Tool – this is a useful checking tool and starting place but may not be totally accurate.

Finally to note – these rules largely stem from Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] – there has been no recent legislation or case law.   Quite often more recent changes in the legislation around IR35 are mistaken as wholesale changes in the Employment Status rules – they are not.

In terms of IR35 the difficulty is that IR35 is considered in terms of the “hypothetical contract” which would exist between the Worker and Client in the absence of any Intermediary, and hence opportunity exists for HMRC to try and imply terms into the construction of the hypothetical contract – anything “hypothetical” is inherently vague.


Employment Status Considerations
Factors indicating existence Factors mitigating against existence
Personal Service
  • Worker is named personally in the contract
  • Clauses preventing sub contract
  • Substitution rights
  • Subcontract rights
  • Right to hire assistance / delegate work
  • HMRC will wish to see any Subcontract, substitution or delegation rights are genuine, accepted by all parties and can be used in practice
Mutuality of Obligation
  • Overarching agreement with little detail about tasks
  • Ability to reassign Worker to different projects
  • Fixed term contracts with little or no link to outcomes
  • Repeat contracts with same Engager for same tasks
  • Specific contract schedules for each agreement
  • Link of contract terms to completion of a project or detailed outcomes
  • A clear agreement as to the tasks being worked on
  • Mutual Obligation is a key principle of an employment contract  – the employer is obliged to offer work, and the employee to undertake it.  This is why a strong outside IR35 contract needs to be precise around the role and work to be carried out.
  • Detailed contract provisions about how work is to be carried out
  • Close supervision of work
  • Tasks assigned piecemeal
  • Agreement simply states outcomes and quality standards, not methods of achieving them
  • The key here is the level of control.  Detailed task level execution control is difficult to defend.



Applying the Status Tests

These tests have to be applied on a contract by contract basis – a “contract” in this context is any discrete piece of work. The results apply to the individual contact, so its possible to have a mixture of IR35 caught and non caught income at the same time.

However whilst the tests apply to individual contracts, the bigger picture also needs to be looked at – sometimes for convenience this is referred to as extra contractual matters – these can have a large positive impact on IR35. Some of the tests referred to above clearly lend themselves to the individual contract, eg substitution; others clearly lend themselves to being looked at extra-contractually, eg business structure tests.


HMRC Employment Status Indicator Tool

HMRCs Employment Status Indicator Tool has had a mixed reception, as many consider it plays down some factors and distorts case law.  It  can be viewed here on HMRC website – experience of its use suggests its useful but not definitive or always correct.  Running facts from decided outside IR35 cases through the Status Tool shows different results to the conclusions reached in the courts and tribunals.

None the less HMRC places emphasis on this tool, to the extent that if used correctly the results are binding on HMRC.  The difficulty here is its easy for HMRC to allege that the answers provided were not accurate, so in reality the ESIT’s protection is limited.  We do advise questions are answered accurately and results from the ESIT kept.


Getting the Contract Right

Although the IR35 status tests are based on the Hypothetical Contract between the Worker and Client, ignoring the Intermediaries (if any), its clear that the signed contacts play an important part in determining IR35 status.


Written Contract

In order to demonstrate that an Engagement falls outside of IR35 the contract must clearly support this. The ideal contract will have the following features:

  • The Workers name will not be mentioned (except possibly as a signatory), i.e. there will be no indication that the Worker is expected to carry out work personally.
  • Clear indications of non personal service – a right of substitution, delegation or sub contract.  Ideally there should be no client approval or veto process for this.
  • A detailed service clause not simply stating the service being provided, eg “widget programming” or “grommet fitting” but also outlining the project, deliverables, milestones, measurement, etc.
    • A detailed service clause can seem daunting it is essential however.
    • A starting point could be codifying:
      • what was discussed at interview/ contract negotiation; and
      • what are the key performance indicators in the job – or put another way what could lead to your contract being terminated
    • To be adequate for IR35 purposes the service clause really needs to run to a minimum of a page – anything less than that runs the risk of not giving enough detail to show that you have been engaged for a specific task.

The above are the main essentials if the contract is to be safely outside the IR35 rules. Below are some “nice to haves” which improve matters:

  • No mention of “timesheets”. Timesheets suggest payment by the hour, that is to say a contract built around inputs, labour hours, rather than outputs, i.e. a finished task
  • An obligation for the Worker to hold Professional Indemnity and/or Public Liability insurances. These are not normal for a Employee, so holding them suggests something other than employment is anticipated by the contract.
  • An obligation for the Worker to correct defective work in their own time / at their own cost. This suggests a responsibility for the work in line with the responsibilities normally assumed under Self Employment.
  • Exclusion of Mutual Obligations. Mutual obligations occur when, by practice or by contract, it becomes customary for someone to offer you work and you to accept it – i.e. a typical employment situation. Excluding mutual obligations makes it clear that something other than employment is anticipated.
  • Explicit parallel contract rights. Again, something which would be unusual, in a contract of employment, and therefore indicative of something other than employment/disguised employment.
  • An express clause saying no employment rights are created – although such a clause will not be determinative of employment status, it is of persuasive influence as regards the intentions of the parties to the contract.

The above points are not determinative – there are many other factors which could be included – the key is to paint the picture of something other than employment.

However a note of caution – the contract isn’t just about IR35, it is a living breathing legal agreement, so make sure it clearly sets out commercial rights and responsibilities as well.  Arguably get these right and IR35 flows out of it.


Working Arrangements

Its important to remember the IR35 decision is based on the Hypothetical Contract.  An Engagement cannot be outside of IR35 by virtue of the written agreement alone; the actual working methods must be consistent with what is in the contract, as it is this working relationship which forms the Hypothetical Contract.

To this end it is important that evidence about the actual performance of tasks points to the Engagement being outside of IR35, and that this is evidenced.   What is needed will vary depending on circumstances, but consider:

  • Confirmation from the Client that the substitution and non personal service clauses are recognised.
  • Confirmation that the Client regards the Worker contractor as an independent resource and not in any way a member of staff.
  • Confirmation from the Client that access to employment type benefits such as Christmas parties, staff discount schemes, etc, is not given.
  • Confirmation from the Client of the project which the Worker has been engaged to work on, milestones for the project and the tasks to be carried out. Evidence should then be retained to support that the Worker worked towards these milestones.

Sometimes a document called a “contract confirmation note” or similar is recommended – an exchange of letters between Worker and Client confirming that the contract is in line with the actual working arrangements. These are a good thing, and cover the ground set out above.


Hypothetical Contract

The starting point for the Hypothetical Contract between Worker and Client is a contract closely based on the contract(s) actually in place. Hypothesised changes should be minimal and should only exist where its is clear that working practices differ from the written agreement.

HMRC often wish to start from a blank sheet when constructing the Hypothetical Contract, but they should not be allowed to exclude favourable clauses included in the PSC to Agent (lower level) contract or Agent to Client (upper level) contract without reason – such a reason would be evidence that they are not recognised in practice, hence the need referred to above to gather confirmatory evidence about actual performance of the contract.

The concept of the Hypothetical Contract is a double edged sword. On the one hand a weak written contract can be strengthened by evidence about IR35 favourable working in practice. On the other hand a strong written contract with IR35 friendly clauses which are not applied in practice, is weakened considerably when converted into a Hypothetical Contract.


Upper Contract

A potential area of dispute with HMRC in the event of a IR35 review is the Agent to Client contract (the Upper Contract) – clearly only where there is an Agent.  HMRC insist that these are relevant to the construction of the notional contract and they have legal backing to request the Upper Contract, on application to the client or agent.

In the event of an appeal hearing relating to IR35 the Taxes Tribunal, an independent tax tribunal, being the first rung in the ladder of the court system for tax appeals, have said that they will expect to have evidence about the working relationship, i.e. the Notional Contract, by the client.


Contract Reviews

Both Workers and Clients need to consider the IR35 status of each contract. If working in the Private Sector, the responsibility for reaching a conclusion is yours until April 2021, and to assist you with this you should consider having contracts reviewed professionally.

We offer two levels of review:

  • Informal contract review for you – the charge for this is £100+vat.
  • Formal contract review service for you – the charge for this is £250+vat.

To initiate a review, email your normal contact at Whitefield.  We are happy to work for both Clients and Workers/PSCs although we cannot advise both sides in one Engagement.


Informal Review

  • The charge for this is £100+vat
  • This is a brief review and only covers headline points of your written contract, provided via a brief email.  Its useful to get a first impression of the IR35 friendliness of the documentation.
  • A informal review aims to identify key issues, however as it doesn’t address working practices it cannot be relied on as a full review as working practices are integral to reaching an IR35 status decision.
  • If you later upgrade to a full review, the fee from the informal review is offset to the full review cost.


Formal Review

  • The charge for this is £250 + vat.
  • You will receive a detailed written report on both the contract and your working practices.
  • In order to use this service you must:
    • Complete a pre-review questionnaire which we will issue
    • Let us have the contract and any schedules
    • Let us have the agent to client contract (unless direct, or its release is refused, in which case ask the agent to confirm that the headline conditions mirror the agent to PSC contract)
  • Please do not ask us to review proposed contracts which have yet to be negotiated with the other parties or personalised to the Engagement
  • We are happy to review contracts pre-signature or at a draft stage, but if you require them reviewing again once signed, then there is a further charge.
  • Our contract reviews are not a full legal review of the contract; they consider IR35 matters only, and no liability is accepted for general legal issues in the contract or advice thereto.
  • We normally aim to turn around reviews within one week.
  • We cannot commit to reviewing contracts to a set pre signature deadline. Contract reviews are a specialist service and we need to allocate the correct staff resources.
  • Part of a contract review is looking at the Agent to Client contract, where there is an Agent involved.  HMRC will request this in the event of a IR35 review, and have legal powers to obtain it from the Agent / Client.  Its therefore important to consider this as part of any review.  Any commercially sensitive pricing / margin information can be redacted.


Whitefield IR35 Services

We have over 30 years experience in the sector, pre dating IR35. We probably have a longer experience than any other UK accounting firm on IR35 matters, given we started advising clients within hours of the original 1998 press release.

Read about our full range of services for Personal Service Companies

There are other IR35 news stories and comment on our site – see them all here