What is IR35 and why does it matter in 2025?

IR35 is the common name for the UK's anti-avoidance tax legislation designed to tackle 'disguised employment'. This is where a client engages a worker through an intermediary, like a limited company, but the relationship is effectively one of an employer and employee. The rules are designed to ensure that workers and their clients pay broadly the same tax and National Insurance contributions (NICs) as an equivalent employee.

First introduced back in April 2000, the rules have undergone significant changes. The most important are the Off-Payroll Working reforms, which shifted the responsibility for determining a contractor's IR35 status from the contractor to the end client. This happened in the public sector on 6th April 2017 and was extended to medium and large private sector businesses on 6th April 2021.

After a brief and quickly reversed proposal to repeal these reforms in late 2022, they are firmly here to stay. With ongoing market shifts, new compliance measures, and a changing regulatory landscape for umbrella companies, understanding your IR35 obligations has never been more critical for UK contractors.

The three main principles to decide IR35 status

Determining whether an engagement falls 'inside' or 'outside' IR35 is complex. HMRC will 'look beyond' the written contract to examine the actual working practices of the engagement. The decision rests on principles established in decades of employment case law, focusing on three key areas.

1. Supervision, Direction, and Control (SDC)

This is a crucial test of employment. HMRC will look at the degree of supervision, direction, and control the client has over what, how, when, and where you do your work.

• Supervision is about the client overseeing your work to ensure it meets their standards.
• Direction involves the client providing instructions, guidance, or advice on how the work should be done.
• Control is where the client dictates the work you do and how you do it, including the power to move you between tasks as their priorities change.

To be genuinely self-employed, a contractor should have a high degree of autonomy over their work. If a contract includes clauses about management guidance, appraisals, or monitoring, HMRC is likely to see this as a sign of employment.

2. Substitution

A genuinely self-employed individual should have the right to send a substitute to perform the work in their place. If you are personally required to provide the service, this points towards an employment relationship.

For a right of substitution to be considered genuine by HMRC, it must be an unfettered right. This means the client cannot unreasonably restrict your choice of substitute. If the client is only interested in your personal skills and would not accept a replacement, any substitution clause in the contract will likely be disregarded. The recent Upper Tribunal case of McCann Media Ltd v HMRC reinforced that contractual clauses must be genuine and reflect the reality of the engagement.

3. Mutuality of Obligation (MOO)

In a typical employment relationship, there is a mutual obligation: the employer is obliged to provide paid work, and the employee is obliged to accept and complete it. For a contractor, this mutuality of obligation should not exist beyond the specific project they are engaged for.

This means:

• The client has no obligation to offer you further work once the current project is finished.
• You have no obligation to accept any subsequent work offered by the client.
• You should have the right to terminate a contract, ideally without a long notice period that mirrors an employee's.

The McCann Media Ltd case also highlighted the importance of MOO, with the tribunal rejecting the appeal and confirming that a sufficient mutuality of obligation existed in that case to point towards employment.

If you can clearly demonstrate that any one of these three principles does not apply to your engagement, it will strongly indicate that you are operating outside IR35.

Other factors that affect the IR35 status of a contract

While SDC, Substitution, and MOO are the main pillars, HMRC considers all aspects of the working relationship. Other factors that help build a picture of your employment status include:

• Financial Risk: A self-employed contractor takes a financial risk. This can include rectifying errors in your own time and at your own cost, having to purchase professional indemnity insurance, and not being paid for periods when you don't work.
• Equipment: Unless there are specific security or practical reasons, a contractor should ideally use their own equipment.
• Being 'Part and Parcel' of the Organisation: If you become integrated into the client's corporate structure—for example, by having staff reporting to you, appearing on organisation charts, or having a security pass that doesn't identify you as a contractor—it can point towards employment.
• Employee-style Benefits: Your contract should explicitly state that you are not entitled to benefits like holiday pay, sick pay, or a pension.
• How You Are Paid: Contractors are typically paid on completion of project milestones or on submitting an invoice for the work done. Being paid a regular weekly or monthly amount, regardless of work completed, looks more like a salary.
• Exclusivity: A contract that prevents you from working for other clients simultaneously is a strong indicator of employment.

It's also important to be able to show you are "in business on your own account". This can be demonstrated by having a business website, business stationery, being VAT registered, and having other clients.

How the Off-Payroll working rules affect you

For contracts with medium and large private sector clients, or any public sector client, the responsibility for determining your IR35 status lies with the client, not you.

Status Determination Statement (SDS)

The client must assess your engagement and provide you with a Status Determination Statement (SDS). This document must state their conclusion (i.e., whether you are 'inside' or 'outside' IR35) and the reasons for it.

Clients are legally required to take "reasonable care" when making this determination. This means they cannot issue blanket, role-based decisions for all contractors and must assess each engagement on its own merits. If they fail to do so, or fail to provide an SDS, the tax liability can remain with them.

Disagreeing with a determination

If you or your recruitment agency disagree with the client's SDS, there is a formal, client-led disagreement process. You can make representations to the client, who must then review the decision and respond within 45 days. If they fail to respond in time, the tax liability can transfer to them.

The small company exemption

The Off-Payroll Working rules do not apply if your end client is a "small" company in the private sector. In this scenario, the responsibility for determining IR35 status remains with you and your limited company.

A company qualifies as small if it meets at least two of the following three criteria in a financial year:

• Annual turnover of not more than £15 million
• Balance sheet total of not more than £7.5 million
• No more than 50 employees

These thresholds were increased for financial years beginning on or after 6th April 2025. However, due to the way company size is assessed based on previous years, this change is not expected to have a practical effect on IR35 responsibilities until the 2026-27 tax year at the earliest.

Note: If you are engaging overseas contractors, you are responsible for making your own IR35 determinations in these cases.

The recent policy rollercoaster of repeal, reversal, and refinements

The IR35 landscape has been particularly volatile in recent years. In its September 2022 "mini-budget", the government announced a surprising plan to repeal the 2017 and 2021 Off-Payroll Working reforms from April 2023.

However, this decision was dramatically reversed just weeks later. On 17th October 2022, the new Chancellor confirmed that the repeal would not go ahead and the existing rules would remain in place.

Since then, the government's focus has shifted to refining the rules rather than overhauling them. A key change took effect from 6th April 2024, which allows HMRC to "set off" taxes already paid by a worker or their intermediary against a PAYE liability owed by a client found to be non-compliant. This was introduced to prevent HMRC from collecting the same tax twice and make the compliance process fairer.

Market impact: contractor rates, umbrellas, and HMRC enforcement

The Off-Payroll reforms have had a significant impact on the UK contractor market.

Contractor day rates and earnings

Multiple surveys in 2024 show that the reforms have negatively affected contractor pay. Research from IPSE found that 38% of freelancers working on inside-IR35 contracts saw their day rates decrease, with average quarterly earnings for this group falling by 30%. Worryingly, 72% of these freelancers reported that they were effectively covering the cost of Employer's NICs through a reduced day rate. Other reports noted a downward shift in typical day-rate bands and that IR35 remains a major concern affecting opportunities and pay.

The rise of umbrella companies

The reforms have led to a surge in the number of contractors working through umbrella companies. HMRC estimated that at least 700,000 workers used an umbrella company in 2022-23. When you work for an umbrella, you become their employee for tax and employment rights purposes.

This growth has brought the sector under intense scrutiny due to widespread tax non-compliance. In response, the government has announced a major change: from April 2026, the responsibility for accounting for PAYE for umbrella workers will shift to the recruitment agency or, if there is no agency, the end client. This is a significant move designed to tackle tax avoidance in the supply chain.

HMRC enforcement

HMRC continues to police the IR35 rules. In the 2022-23 tax year, it reassessed 960 off-payroll engagements for compliance purposes. High-profile tribunal cases against media personalities continue to hit the headlines, with the recent McCann Media Ltd v HMRC case reinforcing how difficult it is to win against HMRC once a determination has been made, especially on the grounds of Mutuality of Obligation.

Tax planning for Limited Company directors

Whether you are inside or outside IR35, understanding how to remunerate yourself from your limited company is vital. For the 2024/25 tax year, the key considerations are:

• Corporation Tax: The main rate of Corporation Tax is 25% for companies with profits over £250,000. A small profits rate of 19% applies to companies with profits of £50,000 or less. Marginal relief is available for profits between these two thresholds.
• Salary: A salary is a deductible expense for Corporation Tax. For 2024/25, you pay no income tax on the first £12,570 (the Personal Allowance). Employee's NICs are payable at 8% on earnings between £12,571 and £50,270, and 2% above that. Your company must also pay Employer's NICs on salary above £9,100. Many directors pay themselves a small salary up to one of these thresholds.
• Dividends: Dividends are paid from post-tax profits and are not subject to NICs. The tax-free Dividend Allowance for 2024/25 is just £500 (down from £1,000 in 2023/24). Above this, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate), depending on your overall income.

If your contract is inside IR35, the fee-payer (client or agency) must deduct tax and NICs from your fees as if you were an employee, so the salary vs. dividend calculation becomes less relevant for that specific engagement's income.

Getting expert help and official guidance

Navigating IR35 is a significant challenge. The rules are complex, and the financial consequences of getting it wrong can be severe. It is essential that your contracts and working practices accurately reflect your status as a genuine self-employed professional.

At Crunch, we offer a range of IR35 services to help you stay compliant. Crunch can provide this service, including in-depth contract reviews and ongoing support.

Official Resources

HMRC provides a range of guidance and tools to help you understand the rules:

• Check Employment Status for Tax (CEST) tool: HMRC's official tool to help determine employment status. While HMRC says it will stand by the tool's result, it has been criticised for not always reflecting complex case law.
• Understanding off-payroll working (IR35): The main overview page for the rules.
• Off-payroll working for clients: Details on client responsibilities and the disagreement process.
• Off-payroll working (IR35): detailed information: A collection of more detailed guidance from HMRC.

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