At Agile Recruit, one of the questions we get asked by IT contractors most often is, “How does IR35 affect limited companies?”

What is IR35?

IR35, also known as the Intermediaries Legislation, is a piece of legislation the UK Government introduced to help HMRC assess whether a contractor is a genuine contractor or a disguised employee claiming the associated tax benefits.

Many IT contractors who work through a limited company do so to enjoy tax efficiency over being a traditional employee. While they do not receive employee benefits such as holidays or sick pay, they have more flexibility over their work.

What changes have happened, and how does IR35 affect limited companies?

HMRC first introduced the off-payroll working rules (IR35) back in 2000 to tackle “disguised employees.”

But for the first few years after its introduction, there was a lot of non-compliance with the rules.

So, the government announced a crackdown on all contractors working in the public sector in 2016.

And in April last year (2021), the UK Government enforced the same crackdown on the private sector – so any IT contractor working as a limited company needs to make sure they know the rules and are working within them.

What do the IR35 rules mean for IT contractors?

If you are investigated by HMRC and found to be not compliant, then you could be forced to close down your limited company or, at the very least, make significant changes.

Why is IR35 being enforced?

In the past, some contractors may have tried to take advantage of the tax efficiencies associated with working through a limited company, despite actually working as though they were an employee.

The benefit for businesses of companies hiring contractors in this way is that they don’t have to pay for their National Insurance (NI) contributions or give them the same benefits as their employees.

The IR35 legislation helps HMRC assess whether contractors are employees when they work for clients or genuine contractors.

If you are believed to be “inside IR35” then HMRC sees you as an employee, and so you will have to pay income tax and NI in the same way as employees do. If you are “outside IR35” you won’t have to do this.

Some contractors find the IR35 legislation hard to understand, with this lack of understanding and perceived ambiguity over the employment status guidelines proving controversial since the law’s introduction.

When does IR35 apply to limited companies?

HMRC has stated that to determine whether IR35 applies to a contract, “you must work out the employment status of the person providing their services.”

The rules also state that IR35 only applies if the contractor “would be an employee if there was no intermediary.” In most cases, the intermediary is the limited company of the contractor.

How can contractors avoid IR35?

This is another question that we get asked a lot, and the only answer is “you can’t.”

Am I IR35 compliant?

If an IT contractor wants to determine whether IR35 applies to their contract, then they need to keep the following principles in mind:

  • Control, Direction and Supervision – how much say does your client have over how your work is completed?
  • Mutuality of Obligation – if your client must offer you work, and you have to accept it, then your contract will fall “inside IR35”
  • Substitution – If you have to complete the contract yourself, and cannot send someone else in your place, then you will fall “inside IR35”

If you have any further questions about any of the IR35 reforms, please feel free to email Jonathon Webley (Managing Director) at or ring him directly on 0161 416 6634 or 07941 798 021.

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