If you work through your own limited company and provide services to clients, IR35 is not something you can afford to ignore. The off-payroll working rules determine whether HMRC views you as genuinely self-employed or as a disguised employee — and the tax consequences are significant either way.

The legislation has been through several major overhauls since it was introduced, and April 2025 brought further changes that have shifted responsibility for determining employment status back to tens of thousands of contractors. If you have not revisited your position since then, now is the right time.

We work with contractors across Greater Manchester and the UK, and IR35 comes up in almost every initial conversation. The honest truth is that most contractors are either over-worried about it or not worried enough — rarely in the right place. This post explains the rules clearly, sets out what changed in 2025, and gives you a practical frame for thinking about your own situation.

At its core, IR35 is about employment status. The rules ask a simple question: if you stripped away the limited company structure and the contractor engaged directly with the client, would that arrangement look like employment?

If the answer is yes — or even probably yes — HMRC considers you to be a deemed employee for tax purposes. That means your income from that engagement should be taxed like a salary: with Income Tax and National Insurance deducted at source, rather than paid through the more flexible dividend and salary structure that makes contracting through a limited company tax-efficient.

The practical tests used to assess status come from case law built up over decades. The three most important are:

• Substitution: can you send a substitute to do the work, or must it be you personally?
• Control: does the client dictate how, when, and where you work, or do you retain genuine autonomy?
• Mutuality of obligation: is either party obliged to offer or accept ongoing work, or is each engagement genuinely discrete?

These are not box-ticking exercises. HMRC looks at the actual working relationship, not just what the contract says. A well-worded contract is necessary, but it is not sufficient on its own.

One of the most confusing aspects of IR35 is that the answer to ‘who determines your status?’ depends on who your client is and how big they are.

For engagements with public sector clients — central government, NHS, councils — the client has been responsible for making the employment status determination since 2017. That responsibility extended to medium and large private sector clients from April 2021.

But here is where the 2025 changes matter. From April 2025, the thresholds for what counts as a ‘small’ company were raised. The turnover threshold increased to more than £15 million, and the balance sheet total threshold to more than £7.5 million. As a result, around 14,000 companies have been reclassified as small — meaning their contractors are once again responsible for their own status determination rather than the client.

If you work with smaller clients, this affects you directly. You now need to assess your own IR35 position for those engagements.

Importantly, contractors now have the right to formally request confirmation of a client’s size, and the client is required to respond within 45 days. If you are unsure whether your client qualifies as small, ask them — you are entitled to that information.

In our experience, the contractors who end up in difficulty with IR35 usually fall into one of three patterns.

Relying too heavily on CEST

HMRC’s Check Employment Status for Tax tool is a starting point, not a verdict. It is widely acknowledged that CEST fails to assess mutuality of obligation properly and gives a ‘cannot determine’ result in a significant number of cases. Using it to confirm you are outside IR35 and then doing nothing further is a risk.

Accepting blanket inside-IR35 determinations

Some clients, particularly larger organisations nervous about liability, have issued blanket determinations that place all their contractors inside IR35 regardless of the actual working relationship. You have the right to challenge this through the client-led status disagreement process. Not every determination is correct, and accepting one without review could cost you considerably.

Having a contract that does not reflect reality

A contract that includes a substitution clause is meaningless if your client would never accept a substitute in practice. HMRC will look at the day-to-day reality of the engagement. Your contract and your working practice need to be consistent. If they are not, the contract will not protect you.

Getting proper advice before you sign a contract — rather than after HMRC comes knocking — is always the cheaper option.

Being inside IR35 does not mean the end of contracting through your limited company, but it does change the economics significantly.

Where the rules apply, the deemed employer — usually the client, their agency, or an umbrella company — must deduct Income Tax and employee National Insurance from your pay, and also account for employer National Insurance on top. The effective tax burden moves much closer to employment, which is precisely the point of the legislation.

In practice, many inside-IR35 contractors work through an umbrella company, which handles the payroll compliance. Take-home pay typically drops compared to operating outside IR35, because the tax-efficient dividend structure is no longer available for those earnings.

One notable improvement from April 2025 is that HMRC will now take into account any tax already paid by the contractor when calculating IR35 liabilities. This reduces the risk of genuine double taxation in cases where there has been an historical dispute. It is a sensible change, and one we welcome — though it does not make a wrongly-issued inside determination any less frustrating.

If you have a mix of inside and outside engagements, it is also worth knowing that the rules apply engagement by engagement. One inside contract does not taint your other work.