IR35 has been part of UK contracting since 2000, and it's still one of the most misunderstood areas for anyone operating through their own limited company. The rules haven't gone away, and getting your status wrong has real financial consequences.
Inside vs. Outside — What It Actually Means
IR35 exists to determine whether someone contracting through a limited company should, for tax purposes, be treated as an employee of the client they're working for. If your engagement is "inside IR35," you're taxed broadly as an employee would be on that income, even though you're operating through your own company. If it's "outside IR35," you're taxed as a genuine business providing services, with the tax efficiency that structure normally allows.
Who Makes the Determination Now
Since the 2021 reforms extended to the private sector, medium and large private-sector clients are generally responsible for determining your IR35 status and issuing a Status Determination Statement, not you. Small companies (broadly, meeting fewer than two of: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees) are exempt from this client-responsibility rule, meaning the contractor's own limited company still determines its own status when working with a genuinely small client. Public sector clients have operated under client-determination rules since 2017.
What Actually Drives the Determination
The core tests look at control (does the client control how, when, and where you work, or do you decide that yourself), substitution (could you send a substitute to do the work, or must it be you personally), and mutuality of obligation (is the client obliged to offer ongoing work and are you obliged to accept it). Genuine outside-IR35 engagements typically show real autonomy over how the work gets done, a genuine right of substitution, and no ongoing obligation beyond the specific contracted work.
The Take-Home Difference
Being inside IR35 means income tax and National Insurance are deducted broadly as if you were an employee of the client (via the fee-payer, typically the agency or client), significantly reducing the tax efficiency of operating through a limited company for that engagement. Outside IR35, you retain the ability to pay yourself via a mix of salary and dividends, which is where most of the tax advantage of contracting through a limited company actually comes from.
Documentation Worth Keeping
Whether you or your client makes the determination, keep records that support your position if it's ever challenged: your contract terms, evidence of how the engagement actually operates day to day (not just what the contract says on paper), examples of genuine autonomy in your work, and any Status Determination Statement issued by a client. HMRC's own Check Employment Status for Tax (CEST) tool can provide an indicative result, though it isn't legally binding and its assessments have been criticised for not always reflecting case law accurately — treat it as one input, not a final answer.
Frequently Asked Questions
Can my status change between contracts with the same client?
Yes — status is assessed per engagement based on the actual working arrangement, not fixed permanently for a given client relationship.
What happens if HMRC disagrees with a determination after the fact?
This can result in backdated tax and National Insurance liabilities, plus potential penalties — which is why contemporaneous documentation of the actual working relationship matters, not just the contract wording.
Where to Go From Here
The Complete UK Limited Company Formation Guide includes a full IR35 chapter covering status determination, documentation, and how it interacts with your company's overall tax position.
Get The Complete UK Limited Company Formation Guide →
This article is for educational and informational purposes only and does not constitute legal or tax advice. IR35 status is fact-specific and rules can change — consult a qualified accountant or tax adviser for your own situation.