IR35 explained: what “inside” and “outside” mean for your contract
IR35, often called the off-payroll working rules, is about people who provide services through their own intermediary. An intermediary sits between you and the client, and is usually a limited company. “Inside IR35” broadly means the engagement is treated as employment for tax purposes. “Outside” means those rules don’t apply to that engagement. The assessment depends on the actual working relationship. HMRC: understanding IR35.
A contract advert says “outside IR35”. Another offers an “inside” rate. Before you compare the money, it helps to understand what those labels mean for that particular job.
It is about the working relationship
The assessment looks at the contract and at how the work actually happens. Features that can matter include:
control
personal service or substitution, meaning whether you have to do the work yourself or could send someone else
financial risk
No single detail, such as having several clients or owning a laptop, settles every case.
HMRC’s Check Employment Status for Tax tool, known as CEST, can help you assess a specific engagement. Accurate answers matter, and complex cases may need specialist advice. HMRC: CEST.
If you’re a sole trader working directly for a client, you’re generally outside these intermediary rules. But the ordinary employment-status rules still apply. Calling an arrangement freelance doesn’t decide its tax or employment-law status. GOV.UK: employment status.
Who decides whether a contract is inside IR35?
For public-sector clients, and medium or large private- and voluntary-sector clients within the rules, the client normally makes the decision. It must take reasonable care and issue a Status Determination Statement. This explains its conclusion, whether inside or outside.
For a small private-sector client, responsibility normally stays with the intermediary. The same can apply with a wholly overseas client that has no UK connection. The size rules are technical, so ask for confirmation rather than judging by how big the client looks. HMRC: client responsibilities.
What changes if the contract is inside?
Under the client-led rules, the deemed employer deducts Income Tax and employee NI from the relevant payment to the intermediary. The deemed employer is whoever is treated as the employer under these rules, and it also accounts for employer NI. It may be an agency rather than the end client. HMRC: deemed employer responsibilities.
Your company still has its accounting and filing obligations. The tax treatment needs to take proper account of deductions already made. And being treated as employed for these tax rules doesn’t automatically give you all employment rights against the client. HMRC: IR35, GOV.UK: employment status.
What about an umbrella arrangement? That’s different, because you’re generally employed by the umbrella company. Ask for a clear breakdown that separates out:
the assignment rate
employment costs
taxable gross pay
deductions
take-home pay
Then compare like with like. HMRC: umbrella companies.
What if you disagree?
Under the client-led process, give the client your specific reasons. It has 45 days to respond to a status disagreement. Keep the contract, the statement and evidence of how you actually work. Look at your status again if the arrangement changes significantly. HMRC: disagreements.
Before you accept a rate, confirm how the engagement is set up, who handles deductions and exactly what amount is being quoted. A headline day rate on its own doesn’t answer those questions.
