What is IR35? Why is it important?

IR35 is hot topic at the moment, whether it be the recent high profile case of against the BBC and Ms Ackroyd or the expected rolling out of last year changes in the public sector to the private sector in the coming year. Needless to say, it’s everywhere at the moment!

With that in mind, let’s take a look at what IR35 is, how does it affect a contractor and what things should be considered when starting a new contract via a limited company.

What is IR35?

Introduced in 1999, IR35 was designed to combat tax avoidance from workers supplying their services to clients via an ‘intermediary’, such as a limited company, but who would be an employee if that ‘intermediary’ was not used.  The term ‘disguised employment’ was used to reflect these types of engagements and was used to save the engaging client tax and NIC but importantly, it restricted employment rights and benefits such as holiday entitlement or notice periods.

How is the IR35 status tested?

When negotiating a position, special consideration should be given to both the contract and the actual working practices. If IR35 status is ever queried by HMRC, they will look to prove the engagement is one of a ‘disguised employment’ if they deem the contract to be ‘within IR35’. The key IR35 case law refers to the employment tribunal, Ready Mixed Concrete (South East) Ltd v Minister of Pensions from 1968. IR35 involves applying three principles to determine employment status from the Ready Mixed Concrete case. These are known as the principal ‘tests of employment’.

What are the principal ‘tests’ of employment? In short, control, substitution and mutuality of obligation?

  • Control: what degree of control do you have over how, when and where the services are provided.
  • Substitution: if you are unable to provide the services yourself, can you send a substitute and are there any restrictions by the client or agency.
  • Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work and you are obligated to accept it. This can be during or after the contract.

There are additional factors that can support the principal tests, such as:

  • Requirement to maintain adequate business insurance throughout the contract.
  • A responsibility for repairing defect work at your own cost and in your own time.
  • A responsibility for providing training and equipment in relation to the services provided.


How do you know if you are inside of IR35?

We recommend that all businesses operating in the contractor market, request an IR35 review before signing a contract with a client or agency.

At Clever Accounts, as part of the on-boarding process, we’d review your contract and provide feedback and any suggestions where relevant.



Posted by David Crossley

Senior accountant and SME specialist