Do i need to worry about ir35

If you’re a contractor or work through your own limited company, you’ve probably heard the term IR35 mentioned at least once. But do you actually need to worry about it? The short answer is: it depends on your circumstances. However, understanding IR35 is essential because getting it wrong can result in substantial tax bills and penalties. Let’s break down what IR35 is, who it affects, and how to determine whether you need to take action.

What is IR35 and why does it exist?

IR35 is anti-avoidance legislation introduced by HMRC to prevent workers from artificially reducing their tax burden by operating through a limited company when they should be classified as employees. In essence, if you’re working as a disguised employee—performing work that would normally be considered employment—but you’ve structured yourself as a contractor to avoid PAYE and National Insurance contributions, IR35 brings you back into the employment tax net.

The rules apply to individuals who provide personal services to clients through an intermediary, typically a personal service company (PSC) or limited company. If IR35 applies to your arrangement, you must pay income tax and employee National Insurance as though you were an employee, even though you’re technically self-employed.

Who is most at risk?

Not every contractor needs to worry about IR35. The legislation primarily targets those who have strong “employment-like” relationships with their clients. Key indicators that IR35 might apply include:

• Working exclusively or primarily for one client
• Working at the client’s premises on their equipment
• Following the client’s instructions and supervision
• Working set hours rather than being results-focused
• Lacking the ability to hire a substitute
• Being integrated into the client’s team structure

If your working arrangements are genuinely independent—you have multiple clients, control how and when you work, can send someone else to do the work, and carry financial risk—IR35 is far less likely to apply.

It’s important to note that from April 2024, the IR35 rules were expanded. The definition of “intermediaries” now includes partnerships and trusts, not just limited companies. This broadens the net considerably, so if you operate through any type of business structure as a contractor, you should review your position.

How do you know if IR35 applies?

HMRC uses a range of tests to determine employment status, collectively known as the “employment status indicators.” These include:

Control: Does the client control how, when, and where you work?

Substitution: Could you send someone else to do your work, or are you personally required to do it?

Mutuality of obligation: Is there an ongoing obligation for the client to provide work and for you to accept it?

Integration: Are you integrated into the client’s organisation, or are you genuinely external?

Financial risk: Do you bear financial risk, or are you guaranteed payment regardless?

The key is that no single factor determines the outcome. HMRC looks at the totality of the arrangement. If the weight of evidence suggests an employment relationship, IR35 will apply.

Many contractors use HMRC’s online Check Employment Status for Tax (CEST) tool to get an initial indication. Whilst not definitive—HMRC can still challenge the outcome—it’s a useful starting point. However, the tool has faced criticism for being overly cautious, so consider seeking professional advice alongside using it.

What happens if IR35 applies but you haven’t paid the tax?

If HMRC establishes that IR35 applies to your arrangement and you haven’t accounted for the correct tax, you could face:

• A tax bill for back years (usually up to four years, but potentially longer)
• Interest on unpaid tax at 8% per annum
• Penalties ranging from 20% to 100% depending on whether HMRC deems your behaviour careless or deliberate

These costs can be substantial, so it’s definitely worth getting clarity sooner rather than later.

What should you do now?

If you operate through a limited company and regularly work as a contractor, review your client arrangements against the employment status indicators. Be honest about the level of control your clients exercise and how integrated you are into their operations.

If you’re uncertain, it’s worth seeking specialist advice. An accountant familiar with IR35 can review your contracts and working arrangements, help you understand your position, and ensure you’re compliant with HMRC’s expectations.

For tailored advice, contact Severn Accounting — we’re here to help.