IR35 Questions Answered


What is IR35

Recently there have been massive changes in the contracting industry, particularly for IT professionals. If you own or intend to own you own company where you are the sole employee - a very common practice for IT Contractors - then this section is essential reading.

Back in March 1999, the Government and Inland Revenue (IR) outlined plans to catch what they term 'disguised employment'. Under the proposed scheme, anyone operating a limited company or partnership for the purposes of providing a service will be classified into one of two categories: employed or self-employed.

Known as IR35, the legislation is designed to prevent employees from forming paper companies for the purposes of avoiding Class 1 National Insurance Contributions (NIC) - basically, a clamp down on a tax dodge.

At its simplest level this means that if you are classed as employed, your days of NIC avoidance are over, and if you are classed as self-employed, its business as usual.

This step means that operating as a contractor is now more complicated. Whether or not you are affected by IR35 depends on your employment status. Are you self-employed or employed? In the event of a dispute, the IR or even a court will start with following key points to make up their minds.


How you complete your work is all-important. If your progress through a task is monitored by your client, possibly with regular, scheduled checks and reviews, then this is a big pointer to employment.

Alternatively, if you are responsible for managing your time and resources in light of meeting a single, final deadline, then this is a pointer to self-employment.


Who decides how a task progresses? If you are given a brief by the client and then as a professional you decide the best way in which the task is to be tackled, then self-employment is on the cards.

If the client dictates to you how the project should progress, new work to be undertaken and sections to be discarded, then your status tends towards employment.


The biggest factor, and often the easiest to categorise, is the issue of control. If you are a member of a large team, performing small, discrete jobs on demand, with no control over the work that goes on around you, then you can be considered an employee.

If you control the project, costing alternatives with a view to best meeting the clients needs, possibly hiring extra employees through your Whether or not you will be affected by IR35 depends on your employment status. Are you self-employed or employed? In the event of a dispute, the IR or even a court will start with following key points to make up their minds.

There are a many more factors that influence which category you fall into, but Supervision, Direction and Control form the Big Three.

The IR has a series of checks that it recommends to individuals wishing to ascertain their employment status. The document is referred to as IR562, and the following extracted questions offer a quick, big picture view:


If you can answer 'Yes' to the following questions, you are probably employed.

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

Can someone tell you at any time what to do or when and how to do it?

Are you paid by the hour, week, or month? Can you get overtime pay?

Do you work set hours, or a given number of hours a week or month?

Do you work at the premises of the person you work for, or at a place or places he or she decides?


If you can answer 'Yes' to the following questions, it will usually mean you are self-employed.

Do you have the final say in how the business is run?

Do you risk your own money in the business?

Are you responsible for meeting the losses as well as taking the profits?

Do you provide the main items of equipment you need to do your job, 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? 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?

What is clear from the IR is that there is no black and white classification procedure. Whilst a checklist of influencing factors can be useful, it is the big picture that is important. Your employment status is not equal to the sum of its checklisted parts.

The rules governing classification into one of the two groups needs to be applied to each contract you do. Self-employment status with one client does not guarantee self-employment status with another, and there is no such thing as running a self-employed business.


How will IR35 Affect my Business?

Essentially, IR35 will affect all contractors who do not meet the Inland Revenue's definition of 'self employment'.

The new rules will result in an increased tax and N.I liability and will prevent contractor companies from retaining profits to grow their business in the future.

Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I), following deductions for expenses. Income will be mainly in the form of a 'deemed salary', following these deductions.

Contractor Companies may have a mixture of IR35 and non-IR35 turnover, in which case income and reward associated with unregulated contracts will escape these rules.

Normal Section 198 expenses may still be claimed. In addition, there is a provision for other intermediary expenses of 5% of a contractor's turnover.

The following expenses can therefore be claimed in addition to the 5% allowance:

* Pension payments - either personal or executive schemes

* Business travel - incurred in the course of business duties

* Subsistence - accommodation, meals when away from home

* Professional Indemnity cover

* Benefits in kind - e.g. private medical insurance

It should be noted that training expenses will not form part of this allowance.

We would advise contractors to seek legal advice to determine their position under the new rules. If you are affected by IR35, you may be able to change the way you work (working practices) and use a new IR35 'friendly' contract to help comply with the legislation.


How can I comply with IR35:

Prove that you are 'self employed', as per the Inland Revenue definition of the term (see above). This is the ideal option. This will typically require an 'IR35 friendly' contract, with working practices which match those stated in the contract.

Contract Overseas - leave for sunnier climbs and get taxed elsewhere. Of course, there are many other reasons why contracting overseas may also appeal (better climate, less pollution, cheaper accommodation costs, etc). Whatever your reason for making the move, you should be aware that overseas tax laws may be more complex than those in the UK, so you should consult a tax specialist before you leave, otherwise you may not necessarily be any better off financially.

Become employed by your main contractor, however if you enjoy having control of your own destiny, you should go for one of the previous options before thinking about going permanent. On the other hand, this may appeal to some contractors who find the uncertainty over IR35 unbearable and prefer to feel more secure about their future.

Do Nothing - many contractors have not addressed the IR35 issue - either hoping that the legislation will be revoked, or believing that it will not apply to them. We would advise against this approach. IR35 is now law, and all contractors should plan in advance for April 2001 when tax liabilities will be due for the first time for those subject to the new rules.

For further information a good web site for the latest up to the minute information is available at