Demystifying IR35: A Practical Guide for Freelancers & Small Businesses

IR35, known as the “off-payroll working” rules, prevents freelancers and contractors from paying less tax and National Insurance by disguising employment through their own limited companies.

If you’re operating via a personal service company (PSC), IR35 is something you need to understand thoroughly.

When Does IR35 Apply?

IR35 applies if, without your PSC, you would effectively be treated as an employee. You’re essentially “inside IR35” if your client controls how, when, and where you work, expects you personally to perform the tasks, and treats you like an integrated employee.

If you genuinely operate independently, have the freedom to choose when and how you deliver your work, and face real financial risk, you’re likely “outside IR35.”

Who Determines Your IR35 Status?

This depends on your client’s size:

• Medium or large clients: They assess IR35 status and provide you with a Status Determination Statement (SDS).
• Small clients: You’re responsible for your IR35 status determination. A “small client” typically has turnover under £10.2 million, fewer than 50 employees, or assets below £5.1 million.

How Do You Check Your IR35 Status?

HMRC’s Check Employment Status for Tax (CEST) tool is a starting point. You should also consider:

• Control: Are you free to deliver work independently?
• Substitution: Could you realistically send someone else to do the job?
• Mutuality of Obligation: Is your client obliged to give you work, and must you accept it?
• Financial Risk: Could you lose money on the project?
• Integration: Are you treated as part of the client’s team?

Consequences of Being “Inside IR35”

If caught by IR35:

• Income from the contract is subject to PAYE-style deductions—meaning higher Income Tax and National Insurance.
• You’ll likely see a reduction in your take-home pay compared to operating outside IR35.

Potential Penalties and HMRC Investigations

Getting IR35 wrong can result in significant penalties:

• Backdated tax liabilities: HMRC can demand unpaid taxes going back four to six years.
• Interest charges: You’ll owe interest on unpaid taxes.
• Penalty charges: Penalties can range from 30% of the unpaid tax (for careless errors) up to 100% for deliberate evasion.

Protecting Yourself and Your Business

Reducing IR35 risk requires clear, accurate contracts, and documented evidence that your working practices match the written terms:

• Regularly review and document your working arrangements.
• Ensure contracts explicitly outline terms that support being outside IR35.
• Consider professional advice or insurance to manage risks and potential investigations.

Helpbox: Your IR35 Partner

Navigating IR35 can feel overwhelming, but you’re not alone. Helpbox provides tailored support to keep your business compliant and your stress levels low.

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Helpbox offers professional IR35 contract reviews, helping you understand your risk and strengthen your position.

For reassurance and practical advice, contact Helpbox today—we’re here to help you thrive.