IR35 is a tax legislation rule which was brought in by the government in 1999, and came into effect as of April 2000. The main idea behind the IR35 rule is that HMRC are able to tax some contractors as though they are employees of the end client that they are contracting for.


IR35 was introduced to prevent people from working under a ‘self employed’ mask when in fact they are working solely for one company, which means that they should be an employee. Contractors who are caught out by IR35 legislation will pay more tax and will have their after-tax pay reduced by up to 25%.

Why was IR35 introduced?

Before IR35 was introduced, many self employed contractors such as IT and engineering contractors were working as a limited company for a single client in order to avoid large tax and national insurance bills. This new legislation prevents this, as depending on the terms of the contract, the contractor may have to be seen as an employee of their client and pay tax as an employed person. HMRC commented that a large number of contractors in the UK were ‘disguised employees’ and that they should be on their client’s payroll.

How does IR35 affect you as a contractor?

Every contractor in the UK, no matter what industry you are in, needs to consider the effects of IR35 on their business. Contractors who fall under the IR35 legislation rules will be subject to what is known as schedule E taxation, but can still claim certain expenses including a 5% allowance to claim for intermediary expenses, and in addition it is also possible to still claim for pension payments, business travel expenses, accommodation and food when working away from home, benefits in kind such as permanent health insurance (PHI) and professional indemnity insurance cover.

Whether or not you fall within the IR35 rules depends on a wide range of factors, including the particulars of your contract with the client, as well as your working arrangements. Whether you are inside or outside IR35 rules really is a grey area, and you may need to seek advice to figure out where you stand to ensure you are not ‘caught out’ and subsequently hit with a large tax bill.

How can I check if I fall under IR35?

First of all you need to ascertain if you are classed as self employed or employed under HMRC rules. The guidelines by HMRC are quite unclear and there are no specifics laid out, so it is important that you involve an expert in the area, such as a tax adviser, if you are unsure. To avoid being caught by the IR35 rules, it is essential that your contract with your clients is ‘IR35 friendly’. Ensure that contract deadlines or end dates are clearly specified in your contract. This does not mean that the contract cannot be reviewed, however if you appear to be working on a permanent basis for a single client yet you are claiming to be ‘self employed’, HMRC may view you as breaking the IR35 rules.