Guide to IR35

Read our ‘Guide to IR35’ and stay ahead of the game. Don’t be a victim…survive IR35!




The purpose of Nasa’s IR35 Guide is to help you understand more about IR35 and to find out how it affects contractors working through their own LTD Company


The guide includes information on the history of the legislation and outlines why it is so important to gain professional assistance in determining whether or not your contracts fall, as HMRC would say ‘inside’ or ‘outside’ of IR35.  It should be noted however that this information should not be relied upon as a tool that solely determines your IR35 status.  It is strongly recommended that you seek a professional IR35 review of each of your contracts along with the true working relationship you have with each client before attempting to declare your IR35 status.


What is IR35, where did it come from and why?

IR35 is a piece of legislation that was introduced by HMRC back in April 2000. The legislation is called the ‘Intermediaries Legislation’ however it is now most commonly known as ‘IR35’.  The intention of IR35 was to stop the abuse of individuals who are, in effect, treated like an employee but provide their services via their own personal service company in an attempt to disguise this ‘employment’.  Individuals do this as they wish to avoid PAYE & NICs – working via your own personal service company enables you to save substantially in tax and NIC by paying profit as Dividend rather than salary. 


If HMRC investigate an individual and consider that a contract is ‘caught’ by IR35, they will calculate a ‘deemed payment’, treating all income received by the company as salary. They will demand that all PAYE and National Insurance contributions on payments originally paid out as dividends are settled as if they were paid as salary. 

Unfortunately, there are many contractors who are in fact genuinely self-employed and who have to struggle to prove it to HMRC.  This is why we cannot stress enough how important it is for you to gain professional advice and assistance from the outset so that you can build a solid, compliant base for your business and retain this going forward.  One major problem with IR35 however, is that the interpretation of it is reliant on case law and as such, the determining factors surrounding IR35 tend to change over time and certain issues become more prominent following each significant case.


Nitty Gritty


When determining your status, HMRC will be looking at 2 factors:


  • the written contract that exists between you and your client (and the contract that exists between your client and your agency if applicable – the upper or higher contract)

  • they will also evaluate the actual working relationship between the parties (your company and the client), looking at your true working practices to see how your work is provided on a daily basis




Key Determining Factors


HMRC have certain criteria they look at when carrying out an IR35 investigation. The three main criteria are; Personal Service/Substitution, Mutuality of Obligation and Control/Direction. There are other factors to take into account too but over time these three have developed into predominant factors in IR35 status. We will list the other factors and talk about them in more detail later on.


So, let’s learn and understand more about each of the criteria.

Personal Service/Substitution

If you are genuinely self-employed, you enter into a contract to provide a service, not an individual. Therefore, the personal service of a particular individual is not what the client should be paying for. This is what HMRC are trying to get to the bottom of. With this in mind, should you be unable to provide the services for whatever reason, HMRC would argue that you should be able to source an alternative worker, a ‘substitute’ to continue providing the services on your behalf. You should of course retain responsibility for any substitute worker and this includes paying the substitute. Of course it’s not that simple in reality and in most circumstances, a substitute worker just isn’t necessary. This makes the personal service/substitution criteria a very tricky one to defend. This is why it is imperative that a genuine right of substitution exists within your written contract with the client. In actual fact, if your contract doesn’t contain such a clause, it is likely to fail a review instantly. As a guide, we have included a suitable ‘compliant’ substitution clause below:

The Consultancy shall provide suitably qualified personnel to carry out the services. In the event that the Consultancy’s initial personnel is unable to provide the services, the Consultancy shall organise a substitute of equivalent skills and expertise to complete the services. The Consultancy shall remain at all times responsible for the services completed and will bear the costs of any substitute worker.

It is important that a substitution clause is not too restrictive i.e. making reference to the fact that the client will ultimately decide on the suitably of the personnel, or having to give notice to the client in order to use a substitute is not acceptable as it inflicts too much control over the situation by the client. You have to demonstrate that you are running a genuine business and therefore you have a genuine right to provide a substitute. The client should only be able to reject a substitute on ‘reasonable’ grounds such as a lack of qualifications or experience.



As a self-employed contractor, HMRC would expect you to provide your own equipment. In some situations, this can prove difficult and again, using a bank as an example, it is very common for them not to allow contractors to use their own laptops for security and confidentiality reasons andHMRC have difficulty arguing with this (although they will of course try). Despite this, you should still have adequate equipment to carry out your services as it should not be expected that every client you work for will have the same issues and restrictions. Also, you would need to use your own computer to do all of your business administration and support relating to your client and the work you are doing for them, you should also have your own business mobile, reference manuals, stationary etc… In situations where you have to use the client’s equipment, you should ideally make a payment to the client for the hire of the equipment, even if it is just a nominal amount. Training is also important as if training is required, this should be paid for by you as it is a benefit to your business.

With regards to your written agreement, if your client provides all of the equipment and pays for any training necessary, and this is confirmed on paper, the agreement is likely to fail a professional review.


Financial Risk

HMRC will always look at the financial risk being taken by a contractor when determining their IR35 status. If you are genuinely self-employed, working via your own limited company, you should most certainly be taking an element of financial risk. For example, you are responsible for your business, you provide all of your own equipment, you hire your own individuals to assist you etc.HMRC are looking for all of these things to help prove that you are genuinely self-employed and that you therefore take a genuine financial risk. Where there is no risk being taken, it is hard to see how anyone can be truly self-employed.


Basis of Payment

Although the basis of payment isn’t detrimental to your IR35 status, as many cases have succeeded where hourly and daily rates have been applicable, the basis of payment can be useful in IR35 investigation cases. Often, some Inspectors believe that hourly, daily and monthly rates of pay are associated with employment and that a self-employed individual should invoice and receive payment on completion of the services provided. However, there are, and have been for a long time, many knowledge based professionals who are paid by the hour or day and so this argument doesn’t really stand up. To strengthen your position however, it is certainly worth providing an overall estimate of the project and services to be provided and invoice at identifiable stages wherever possible. It is also important to bear the cost of your own expenses and overheads. These should be considered in your quote for the services or when the rate is agreed at inception.


Business-like Trading

Being able to demonstrate that you are in business on your own account is useful. It is good to be able to show off your business-like assets such as your VAT registration (if applicable), business insurances i.e. EL/PL and PI, health and safety requirements, licenses, advertising etc. Anything that helps to show that you are a genuine business can be shown to HMRC in the event of an IR35 investigation


Working Practices

Throughout this guide, we have mentioned both the written contract and your actual working arrangements/working practices as each entity bears an important weight in its own right when it comes to IR35. HMRC do state however that although the written contract is taken into account, it is the true working relationship that is most important and therefore, we strongly advise that once you are confident that your working practices are compliant, ask your client to sign a ‘Statement of Working Practices’ document confirming and agreeing to how you provide your services on a daily basis and your working relationship with them. This document can then be used in an investigation and has proved in the past, to be an extremely powerful document to have. Simply asking your client to confirm how you work can save a substantial amount of time in an investigation.

Mutuality of Obligation

This is probably the hardest test of all to overcome and it can get a little confusing but in simple terms, when you are employed, there is an obligation for your employer to continue providing you with work and you are obliged to continue working for them. There is no set completion date to your employment.

However, with self-employment, the situation is quite the opposite. You are not obliged to continue providing services to the client and they are not obliged to provide you with work. You usually have a completion date to your contract at which point all services will come to an end. When work is carried out over a continuous period of time, HMRC argue that employee status has been created by custom and habit. This is why many contractors prefer short contracts and to move on regularly.

It is extremely important for your written contract to contain a completion date. This can be extended at a later stage if necessary however without an indication of when the work will cease,HMRC will take the view that it could be on-going and therefore a mutuality of obligation could exist.

A useful clause to include in your written agreement with the client is included below:

There is no obligation for the client to provide continual work to the Consultancy and the Consultancy is not obliged to accept further work if offered. Both parties agree and intend for there to be no mutuality of obligation.



Control is very important and is probably the easiest test to prove. You need to be able to demonstrate that you have control over how, when and where the services are provided. The client should not be controlling or supervising your work on a daily basis, telling you what hours you will work and where you will be working from, as would be the case in an employment role. Neither should the client be able to move you from job to job as this would also demonstrate too much control over you.

How you perform your services should be up to you. Once the overall specification has been provided to you, it should be up to you how you get the work done as long as it is completed within the overall timescale agreed. You should not be monitored or supervised. Regular updates are acceptable to ensure that the project is going to be completed on time but overall, how the work is completed should be down to you. You are a professional business providing expert services after all.

When you perform the services should also be at your own control. You should not be expected to work a standard 9 till 5 day as the client’s employees may work. In fact, it is probably better if you don’t. As long as the work is being done and deadlines are being met, there should be no reason why the client should have any control over your working hours. (The recording of your time on timesheets is perfectly acceptable and is industry standard and although HMRC may comment on this form of time recording, it will bear no real importance in an overall investigation).

Where the services are performed – if you are dealing with a client who has high security and confidentiality systems in place, i.e. a bank, you may not have any choice but to provide all of the services from the client’s site. This would be acceptable. However, wherever possible, you should provide the services from your own location as this helps to demonstrate that you have control over where the services are provided. If there are no real reasons why you cannot work from your own premises, but you choose to work at the client’s site each day, working standard office hours,HMRC could try and use this against you as it would be a similar working pattern to that of the client’s permanent employees and it will not demonstrate that you have any control over where you perform your services.

A suitable control clause for inclusion in your written contract is included below:

The Consultancy has full control over how, when and where the services are provided. The client shall not exercise any control, supervision or direction over the Consultancy in the provision of the services. The Consultancy shall have autonomy over their working methods but will co-operate with any of the client’s reasonable requests. The services shall be provided at such locations and during such hours as the Consultancy deems appropriate for the satisfactory provision of the services.

So, we have covered the three main factors HMRC use when investigating a contractor under the IR35 rules, however there are also other factors that are taken into account and are often used to build a case. These factors should be taken as seriously as the three tests commented on above.


Exclusive Service

As a self-employed contractor, you should not be bound to any one client. Your contract should ideally contain a non-exclusivity clause specifically stating that the agreement is not exclusive and that you are able to provide your services to others during the course of the agreement. This is very important and if your contract implied that you were not able to provide your services to others, it would be considered a failing factor.


Part and Parcel

This is another important factor to take into account as HMRC will look to see whether or not you have become part and parcel of the clients business. This may include things like business cards which imply that you are employed by the client, receiving the same benefits as the clients employees (for example a subsidised staff canteen), being included on staff social events, having a staff parking space, a staff entry badge etc… It may seem like these are small unimportant things, but they can actually harm your self-employed status. If you are asked to provide client business cards, they should clearly state that you are a self-employed contractor, as should the entrance badge. You should not have a dedicated parking space, be able to use a subsidised canteen or have free use of the staff gym. You have to completely separate yourself from the client’s employees. If you receive the same staff benefits, over time you will start to integrate yourself into the clients business and become part and parcel of the client’s organisation.



To summarise, if you’re going to survive IR35, you need to have a compliant contract that contains all of the key IR35 assessment criteria and you need to ensure that your contract and working practices reflect one another.


This information should be used as a guide only, and we strongly recommend taking out professional advice relating to your IR35 status.


Nasa Consulting provide detailed IR35 appraisal services covering all aspects outlined above. For more details please contact you personal accountant (if already a client) or our Sales Team directly for information. They can also be reached on (0117) 929 7683 – Option 1.

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