What IR35 actually is
IR35 is shorthand for the UK's "intermediaries legislation" — tax rules designed to catch situations where someone works like an employee but bills through a company or as a self-employed individual to avoid PAYE and NICs.
The wider employment-status rules go beyond tax. If a tribunal decides your freelancer is really a worker or employee, you could owe holiday pay, sick pay, pension contributions, redundancy and unfair dismissal compensation on top of the tax bill.
The three things HMRC actually cares about
Every status case, whether it's a £1.7m TV presenter dispute or a small agency using freelance designers, comes down to the same core questions.
Control. Do you set how, when and where the work is done — or do you set the outcome and let the contractor decide the rest? The more control you exercise, the more it looks like employment.
Personal service vs substitution. Does the contractor have a genuine, exercisable right to send someone else in their place? If it's "you or nobody," that's employment territory. If the contractor can — and would — send a qualified substitute and pay them out of their own fees, that's a strong self-employment indicator.
Mutuality of obligation. Is there an ongoing expectation that you'll keep providing work and they'll keep accepting it? Genuine contracting means each engagement is standalone — when the project ends, neither side owes the other anything.
Real cases that show the cost
| Case | What went wrong | Cost |
|---|---|---|
| Home Office (HMRC, 2021) | Incorrectly assessed IR35 status using CEST | £29.5m unpaid tax + £4m penalty |
| Department for Work and Pensions | Off-payroll errors 2017–2021 | £87.9m tax liability |
| Adrian Chiles / Basic Broadcasting (UT, 2024) | TV presenter through PSC; HMRC argued employment | Found inside IR35 — approx. £1.7m |
| Eamonn Holmes / Red, White and Green (FTT, 2024) | Presenter through PSC for ITV | Inside IR35 — control and employment-like benefits decisive |
| Uber (Supreme Court, 2021) | Drivers labelled "self-employed partners" | Worker status — holiday pay, NMW; Uber restructured entire UK model |
| Pimlico Plumbers (Supreme Court, 2018) | Plumber in branded uniform, company van, integrated into operations | Worker — entitled to holiday pay |
These aren't edge cases. The pattern is clear: if reality looks like employment, the label on the contract won't save you.
What small businesses actually need to do
You don't need a compliance department. You need a basic process.
Before you engage a contractor:
- Decide honestly: is this a defined project or a permanent role? If it's permanent, hire an employee.
- Check the contractor's business setup — company, sole trader, VAT registration, insurance, other clients.
- Complete an employment-status checklist and file it. If your business is medium or large for off-payroll purposes, run HMRC's CEST tool as well and save the output.
When you set up the engagement:
- Use a proper Contractor Agreement with a separate Schedule of Services for each piece of work.
- Make sure the contract includes genuine substitution rights, no mutuality of obligation and clear project-based scope.
While the work is running:
- Treat the contractor like a supplier, not a member of staff.
- Don't give them set hours, company email, job title, appraisals or staff perks unless genuinely necessary.
- If the engagement is rolling past 18 months with no breaks and no other clients, stop and reassess.
Myths to stop believing
"They have a limited company, so we're safe." Wrong. IR35 looks through the corporate structure at the underlying reality of the working relationship.
"The contract says they're self-employed, so HMRC can't argue." Wrong. HMRC and tribunals look at what actually happens day to day, not just what the paperwork says.
"IR35 is just the contractor's problem." Wrong. If the off-payroll rules apply to your business and you get the status determination wrong, the tax liability sits with you. Even outside the off-payroll rules, employment-status claims for holiday pay, NMW and unfair dismissal hit the engager.
"We're too small for HMRC to bother with." Increasingly wrong. HMRC compliance checks are rising, tribunal open cases were up 18% in 2024, and the small-business exemption from the off-payroll rules only covers the Chapter 10 PAYE obligation — it doesn't protect you from employment-status claims or from HMRC challenging the contractor's own tax position.
What to do next
Download our free IR35 & Employment-Status Checklist — a tick-box tool you complete before each engagement to map your risk across control, substitution, mutuality, financial risk and integration.
If you want the full system — contracts, Schedule template, checklist and guidance — take a look at the Contractor Agreement Pack.
Related Templates for Contractors
Engaging freelancers? Get our Contractor Agreement Pack – contractor agreements, IR35 checklist and managers' guidance for UK businesses.