Understanding your IR35 status is crucial if you’re working as a contractor or freelancer through a limited company in the UK. With HMRC tightening compliance and penalties, it’s more important than ever to ensure you determine your IR35 status correctly from the very beginning.

This guide is tailored for independent contractors, freelancers, and small business owners. We will explain how IR35 works, why status determination matters, and how Nexus Accounting can help you navigate the complex IR35 landscape.

• What is IR35?
• Why IR35 Status Matters for UK Contractors
• Inside vs Outside IR35: What’s the Difference?
• How to Determine Your IR35 Status
• How IR35 Affects Limited Companies
• What HMRC Looks at in an IR35 Investigation
• How to Stay Compliant with IR35 UK Regulations
• Key Takeaways for IR35 Status
• IR35 UK FAQs

What is IR35?

Introduced in 2000, IR35—officially known as the Intermediaries Legislation—is designed to prevent tax avoidance by contractors who provide services through a limited company, but who would otherwise be classed as employees if engaged directly.

The rules ensure that such individuals pay broadly the same Income Tax and National Insurance contributions as regular employees. HMRC assesses this by looking at the nature of the working relationship between the contractor and the end client.

IR35 applies across a wide range of industries including IT, engineering, media, construction, and healthcare—making understanding and applying it correctly essential.

Why IR35 Status Matters for UK Contractors

Getting your IR35 status wrong can lead to:

• Backdated tax bills, penalties, and interest from HMRC
• Reduced take-home pay due to being taxed as an employee
• Reputational damage with clients
• Legal disputes and contract issues

For contractors working in the private sector, the responsibility for determining IR35 status now lies with the client if they are medium or large businesses. In the public sector, this change has been in place since 2017.

However, if you work with small private-sector clients, you’re still responsible for your own IR35 determination—making professional advice critical.

Inside vs Outside IR35: What’s the Difference?

Understanding the difference between being inside and outside IR35 is crucial:

Inside IR35

• HMRC considers you an employee for tax purposes.
• Income is subject to PAYE tax and NICs.
• No access to certain tax reliefs such as travel or subsistence.
• Reduced tax efficiency.

Outside IR35

• You’re genuinely self-employed in the eyes of HMRC.
• Paid gross via your limited company.
• Can claim allowable expenses, dividends, and remain tax-efficient.
• Greater control over finances.

Knowing where you stand helps you structure your contracts, finances, and working relationships effectively.

How to Determine Your IR35 Status

Determining your IR35 status is complex and based on multiple factors. HMRC uses the Check Employment Status for Tax (CEST) tool, but this has limitations and doesn’t guarantee protection. A professional review is often recommended.

Here are some key status indicators:

1. Supervision, Direction & Control (SDC)

Are you being told how, when, and where to work?

If yes, you may be inside IR35.

2. Substitution Clause

Can you send someone else to do the work?

Genuine substitution clauses can help show you’re outside IR35.

3. Mutuality of Obligation (MoO)

Does the client have to offer work, and do you have to accept?

The presence of MoO often points toward employment.

4. Provision of Equipment

Do you use your own tools and equipment?

Using client equipment suggests employment.

5. Financial Risk

Do you bear any financial risk (e.g. fixing errors at your own cost)?

If yes, this supports a self-employed status.

At Nexus Accounting, we offer thorough IR35 contract reviews to help you interpret these factors with professional clarity.

How IR35 Affects Limited Companies

If you’re operating through a limited company, IR35 can dramatically affect how you get paid and taxed.

Financial Implications:

• Inside IR35: You’ll be paid via PAYE with full deductions.
• Outside IR35: You can pay yourself via salary and dividends for better tax efficiency.

Administrative Burden:

• Being caught inside IR35 means additional compliance requirements.
• You may need to process payroll and make Employer’s NIC contributions.

Impact on Business Planning:

• Clients may be cautious when hiring contractors due to IR35 risks.
• Some contractors may find opportunities dry up or contracts terminated early.

Our Limited Company Accounting service ensures that your finances are set up under the correct structure from the very beginning.

What HMRC Looks at in an IR35 Investigation

If HMRC decides to investigate your IR35 status, they will look at both your contract and the reality of your working practices. 

They may ask:

• Do you have multiple clients?
• Are you treated like an employee (e.g. attend staff meetings, given appraisals)?
• Are you integrated into the business?

They’ll also scrutinise your:

• Emails and communications
• Invoices
• Contracts and amendments
• Tax returns and dividend payments

A proactive IR35 assessment and having strong documentation in place can protect you from a costly ruling.

How to Stay Compliant with IR35 UK Regulations

We offer tailored solutions for IR35 and contractors looking to reduce risk and maximise income.

1. Review Your Contracts Regularly

Make sure each contract clearly reflects a self-employed working relationship.

2. Keep Clear Records

Document everything, including evidence of financial risk, substitution arrangements, and independent working practices.

3. Avoid ‘Disguised Employment’

Ensure you are not effectively working as a permanent member of the client’s staff.

4. Seek Professional Advice

Let experts like Nexus Accounting help you stay compliant and optimise your position.

Key Takeaways for IR35 Status

• IR35 is about employment status and tax liability—not your business structure.
• Inside IR35 = taxed like an employee.
• Outside IR35 = remain self-employed and retain tax benefits.
• Factors like control, substitution, and mutuality of obligation all contribute to your status.
• You may be responsible for determining status if you contract with small businesses.
• Professional help is strongly recommended—tools like CEST are not always reliable.

IR35 UK FAQs

What is IR35 status and how is it determined?

IR35 status refers to whether a contractor is ‘inside’ or ‘outside’ IR35 rules. It is determined based on working arrangements and contract terms, considering factors like control, substitution, and mutuality of obligation.

How does IR35 affect limited company contractors?

If you’re inside IR35, you must pay Income Tax and NICs like an employee, reducing your take-home pay. Outside IR35, you can pay yourself via dividends and maintain tax efficiency.

Achieve IR35 Compliance with Nexus Accounting

Understanding and determining your IR35 status is essential to protecting your income, avoiding HMRC penalties, and staying compliant. As a contractor, freelancer, or medical professional working through a limited company, IR35 can significantly impact your financial planning and operational freedom.

At Nexus Accounting, we specialise in IR35 support for all professionals working as part of a limited company. Whether you’re just starting out or reassessing your IR35 status, our experienced advisors are here to help with our comprehensive accounting package. Enquire today to learn more.