IR35, or the “off-payroll working rules”, is a set of tax regulations from HMRC. These rules identify “disguised employees” – contractors working through their own limited companies but acting as employees. The goal is to ensure contractors pay similar income tax and National Insurance contributions (NICS) as employees, no matter their business structure.
At Professional Saver, we know IR35 can be difficult to navigate. With over 40 years of experience in specialist insurance, we’ve supported many self-employed individuals in protecting their businesses while managing IR35 obligations. Our team provides tailored insurance solutions that meet the unique needs of professionals considering their IR35 status. This is your comprehensive guide to IR35.
What Exactly Is IR35 and Why Was It Introduced?
IR35 legislation was first introduced in April 2000 as part of the Finance Act. HMRC created these regulations to tackle what they perceived as tax avoidance by workers supplying their services through an intermediary (typically a limited company, also known as a Personal Service Company or PSC) who would otherwise be deemed employees if the intermediary weren’t used.
The core purpose of IR35 is to differentiate between:
- Genuine contractors (outside of IR35) – Those who are legitimately in business on their own account.
- Disguised employees (inside of IR35) – Those who work in a manner indistinguishable from employees but use a company structure to gain tax advantages.
Before IR35, individuals could significantly reduce their tax liability by receiving payments as dividends (which aren’t subject to NICs) rather than as salary. This arrangement could save individuals and the businesses hiring them thousands of pounds in tax and NICs annually.
What Are the Key Tests Used to Determine IR35 Status?
When assessing whether a contractor falls inside or outside IR35, HMRC and tax tribunals consider several fundamental factors. These are largely based on case law that has developed over decades:
Are You Under Someone’s Control?
The degree of control the client has over how, when, and where you complete your work is crucial. Greater client control typically points toward employment (inside IR35).
| Control Factor | Outside IR35 Indicator | Inside IR35 Indicator |
| Working hours | Set your own schedule | Client dictates hours |
| Work location | Choose where to work | Must work at client site |
| Work methods | Determine how tasks are done | Client directs methods |
| Supervision | Minimal oversight | Regular supervision |
Can You Send a Substitute?
A genuine right of substitution is a strong sign you’re outside IR35. This means you can send someone else to do the work in your place, and importantly, you’ve either done this before or could do it realistically.
Is There Mutuality of Obligation (MOO)?
This examines whether:
- The client is obliged to provide work
- You are obliged to accept work when offered
- The client must pay you regardless of performance
Less mutual obligation suggests a contractor relationship (outside IR35).
Do You Take Financial Risk?
Genuine businesses invest in their own equipment, have professional indemnity insurance, and face the possibility of making a loss. They may also need to fix unsatisfactory work at their own expense. These financial risks are strong indicators of being outside IR35.
What Were the Effects of the 2021 Changes to IR35?
April 2021 marked a significant shift in IR35 responsibility within the private sector, mirroring changes already implemented in the public sector in 2017:
- Before April 2021 – Contractors determined their own IR35 status.
- After April 2021 – Medium and large private sector clients became responsible for determining contractors’ IR35 status.
This shift means clients must now provide contractors with a Status Determination Statement (SDS) that:
- Declares the contractor’s deemed employment status
- Provides reasons for reaching that conclusion
- Shows reasonable care was taken in making the determination
Small companies remain exempt from these changes. Therefore, contractors working with small private sector clients still determine their status.
What Are the Financial Implications of Being Inside vs Outside of IR35?
The financial impact of IR35 determination is substantial:
Inside IR35:
- Income is subject to PAYE
- Both employee and employer NICs apply
- No expense allowances (except for certain approved items)
- Reduced take-home pay (typically 15-25% less)
Outside IR35:
- Greater tax efficiency through salary and dividend mix
- Broader expense allowances
- Higher net income potential
- More administrative responsibility
How Can Contractors Strengthen Their Outside IR35 Position?
To strengthen your position outside IR35, start by negotiating a genuine right of substitution and documenting it clearly in contracts. Work with multiple clients where possible, and use your tools instead of relying on client-provided equipment. It’s also important to refuse employee benefits like paid holidays or sick pay and create a professional business identity that is separate from your clients.
Additionally, maintain physical distance from permanent employees where possible and focus on invoicing for completed work, rather than working on hourly or daily rates. These practical steps can help reinforce your position and ensure you meet the criteria for being outside IR35.
What Insurance Do Contractors Need When Considering IR35?
Insurance plays a vital role in IR35 determination and general business protection:
- Professional Indemnity Insurance – Can protect against claims of professional negligence and is a strong indicator of financial risk (an outside IR35 marker).
- Public Liability Insurance – Can cover third-party injury or property damage, demonstrating business-like arrangements.
- Legal Expenses Insurance – Can cover legal costs like IR35 investigations.
Professional Saver offers all these essential policies from just £54 per year. Public liability cover up to £5 million is available to meet most client requirements.
Why Consider Professional Saver for Your Contractor Insurance Needs?
IR35 and insurance requirements can be complex for independent professionals. Professional Saver specialises in tailored insurance solutions that protect your business and may support your IR35 position by showing financial risk and business-like arrangements.
Our policies start at £54 per year, with monthly payments available for policies over £125. We offer quick online quotes and immediate cover, so you can focus on running your business with peace of mind.
Protecting Your IR35 Position with the Right Insurance
Understanding IR35 rules is essential for contractors and freelancers. By taking steps like negotiating substitution rights, using your tools, and managing financial risks, you can improve your position outside IR35. Insurance is also important, protecting your business and supporting your IR35 status.
Professional Saver offers tailored insurance solutions to meet the needs of independent professionals. Our policies help protect your business while potentially strengthening your IR35 position. Get a quick online quote today and benefit from immediate protection.
