IR35 Rules: How They Affect Contractors and Freelancers in the UK

If you’re a contractor, freelancer, or work through a limited company, then IR35 is a term you need to understand. These rules have had a massive impact on how independent workers are taxed, and getting it wrong can mean hefty fines and unexpected tax bills.

At Black & White Accounting, we help contractors and businesses navigate IR35 to ensure they stay compliant and avoid costly mistakes. Here’s everything you need to know about IR35 and how it affects you.

A Brief History of IR35

IR35, also known as the off-payroll working rules, was introduced in April 2000 by HMRC to tackle tax avoidance. The aim was to stop workers from setting up personal service companies (PSCs) to avoid PAYE tax and National Insurance when they were essentially working as employees.

Since then, IR35 has undergone several changes, with major reforms in 2017 (public sector) and 2021 (private sector) that shifted the responsibility for determining IR35 status from contractors to their clients in many cases.

What Are the IR35 Rules?

IR35 determines whether a contractor is genuinely self-employed or should be taxed like an employee. The key tests to determine status include:

📌 Control – Does the client control how, when, and where you work? If yes, you may be inside IR35. 📌 Substitution – Can you send someone else to do your work, or does the client require you specifically? If you can’t substitute, you may be inside IR35. 📌 Mutuality of Obligation (MOO) – Does the client have to offer you work, and are you obliged to accept it? If yes, you might be inside IR35.

If a contractor is inside IR35, they must pay Income Tax and National Insurance Contributions (NICs) like an employee, but without the benefits (holiday pay, sick pay, pensions). If outside IR35, they are considered genuinely self-employed and can pay themselves more tax-efficiently.

Who Does IR35 Apply To?

✅ Freelancers and Contractors – Especially those working through a Personal Service Company (PSC). ✅ Businesses Hiring Contractors – Companies hiring independent workers must assess their IR35 status. ✅ Public and Private Sector Clients – Public sector clients (since 2017) and medium/large private sector clients (since 2021) must determine IR35 status. ✅ Agencies Placing Contractors – Recruitment agencies can also be responsible for ensuring IR35 compliance.

Sole traders are not affected by IR35 but must still follow HMRC’s rules on self-employment.

How Has IR35 Evolved?

🔹 Pre-2017: Contractors Determined Their Own Status

Before 2017, contractors working through limited companies had to decide if they were inside or outside IR35. Many misclassified themselves as outside IR35 to reduce their tax bills.

🔹 2017: Public Sector Reform

From April 2017, the responsibility for determining IR35 status shifted to public sector clients (e.g., NHS, government departments). Many contractors were deemed inside IR35, leading to higher taxes.

🔹 2021: Private Sector Reform

In April 2021, the same rules applied to medium and large private sector businesses, meaning clients, not contractors, had to assess IR35 status. Small businesses (meeting two of these three criteria) are exempt: ✔️ Turnover under £10.2m ✔️ Balance sheet under £5.1m ✔️ Fewer than 50 employees

If a company qualifies as small, contractors working for them still determine their own IR35 status.

What is CEST? (Check Employment Status for Tax)

CEST is HMRC’s official online tool to determine IR35 status. It asks questions about: ✅ Working practices ✅ Control and substitution ✅ Financial risk and obligations

However, CEST has been criticised for inconsistent results and failing to consider key legal precedents. Many businesses and contractors seek expert advice instead of relying solely on CEST.

What Happens If You’re Inside IR35?

🔹 You’ll pay Income Tax and NICs at source via PAYE. 🔹 You won’t be able to split income between salary and dividends. 🔹 You may receive lower take-home pay than if you were outside IR35. 🔹 Your client or agency will be responsible for deducting tax before paying you.

If found to be wrongly operating outside IR35, HMRC can demand backdated tax payments, penalties, and interest.

How Black & White Accounting Helps Contractors & Freelancers

IR35 is complex, but we make compliance simple. Here’s how we can help:

✔️ IR35 Status Reviews – We assess your contract and working practices to determine whether you are inside or outside IR35. ✔️ CEST & Alternative Status Checks – We guide you through IR35 status checks and provide expert analysis beyond CEST. ✔️ Contract Structuring Advice – We help you draft contracts that align with self-employment rules. ✔️ Tax Planning Strategies – If inside IR35, we help minimise your tax burden legally. ✔️ Negotiating with Clients – We assist with disputes and discussions about IR35 status. ✔️ Handling HMRC Investigations – If you’re facing an IR35 review or inquiry, we stand by you every step of the way.

How to Stay IR35 Compliant & Maximise Your Income

📌 Review Your Contracts Regularly – Ensure your agreements reflect true self-employment. 📌 Demonstrate a Self-Employed Mindset – Work for multiple clients, invest in your own equipment, and take on financial risk. 📌 Seek Professional Advice – HMRC mistakes can be costly, so get expert guidance from accountants who understand IR35. 📌 Use an Umbrella Company if Needed – If inside IR35, consider working via an umbrella company for tax simplicity. 📌 Keep Records of Your Work & Control – Maintain evidence that you control how you work, reducing the risk of being deemed inside IR35.

Don’t Let IR35 Catch You Out!

The rules around IR35 are changing all the time, and mistakes can be expensive. Whether you’re a contractor, freelancer, or hiring company, getting expert advice is crucial.

📞 Get in touch with Black & White Accounting today – We’ll help you stay compliant, avoid penalties, and maximise your earnings while working under IR35!

🚀 IR35 doesn’t have to be complicated—let’s make it simple!