Written by Sam

Recruitment Panda ® IR35 Guide: Are You In or Are You Out? 

Recruitment Panda ® IR35 Guide: Are you in or are you out? 

Understanding IR35 status is crucial for contractors like management consultants in the social care sector. 

Being "inside IR35" or "outside IR35" is all about your employment status for tax purposes. These terms define whether the UK’s IR35 legislation (the off-payroll working rules) applies to your contract. If IR35 applies (inside IR35), you’re treated like an employee for tax, and if IR35 doesn’t apply (outside IR35), you’re viewed as a genuine independent contractor. With recent updates to the law (including major reforms in 2017 and 2021), it’s vital to know where you stand – especially for health and social care management consultants who often work through their own limited companies. Below, we explain what IR35 is, what inside vs. outside IR35 means, and how to determine your status under the latest rules.

What is IR35?

IR35 (also known as the intermediaries legislation or off-payroll working rules) is a set of tax laws designed by HMRC to identify “disguised employees” – contractors who do the same work as regular employees but operate through a personal service company (PSC) to gain tax advantages. The IR35 rules ensure that a contractor who works in the same manner as a permanent employee pays roughly the same Income Tax and National Insurance as an employee would (gov.uk). In other words, if you are working through your own limited company but effectively function as an employee of your client, IR35 is intended to prevent you from paying less tax than you should. 

Originally introduced in 2000, IR35 aimed to stop the classic “Friday-to-Monday” scenario – where someone leaves a job on Friday as an employee and returns Monday doing the same work as a contractor via their own company, thus paying less tax (en.wikipedia.org). Under IR35, HMRC can “look through” the contract between your company and the client to judge if, hypothetically, you would be an employee if hired directly (en.wikipedia.org). If so, that contract falls inside IR35. 

Latest IR35 Legislation: In April 2021, the government introduced off-payroll reforms extending IR35 rules to the private sector (mirroring public sector changes from 2017). Now, for medium and large clients, the end client is responsible for determining a contractor’s IR35 status, not the contractor. (If the client is a small business as defined by HMRC, the contractor remains responsible for their own IR35 assessment (hiscox.co.uk/kingsbridge.co.uk.) In practical terms, this means most recruitment agencies or consultancies hiring contractors must assess whether a contract is inside or outside IR35 and inform the contractor via a Status Determination Statement (SDS) (kingsbridge.co.uk).

Note: In late 2022, there was a proposal to repeal the 2017/2021 IR35 reforms, which would have put status decision-making back on contractors. However, that plan was reversed by the government, so the off-payroll rules remain in force as of 2025. Contractors and clients should continue to abide by the current IR35 framework. 

What does it mean to be inside IR35?

If you are “inside IR35,” it means that, for tax purposes, you are treated as an employee of your client. You must pay income tax and National Insurance just like a permanent employee would (hiscox.co.uk). In practice, this typically means Pay As You Earn (PAYE) deductions will be taken from your contract income. Under the off-payroll rules, the entity that pays you (e.g. your client or an agency, known as the “deemed employer”) is required to deduct the appropriate Income Tax and employee National Insurance from your fees and send those to HMRC (gov.uk). They also must pay employer’s National Insurance contributions on top of your fee to HMRC (gov.uk) – just as an employer would for a regular employee. 

Being inside IR35 often implies you are a “disguised employee.” HMRC believes your working arrangement resembles regular employment – for example, you work under your client’s direction, work similar hours as employees, and may even receive staff benefits or holiday pay. In such cases, HMRC wants to ensure you don’t get a tax advantage by operating through a company. If an investigation finds that you’ve been wrongly claiming to be outside IR35, you (and potentially the client) could be liable for back taxes, interest and penalties. Under current rules, HMRC can recover unpaid taxes and National Insurance from the party that should have paid them. So if, say, a client fails to properly assess you and doesn’t deduct PAYE when they should have, HMRC can demand the missing tax and NIC from the client (or agency) for an inside-IR35 engagement (gov.uk). This makes end clients very cautious with IR35 assessments. 

In summary, inside IR35 means:

• You pay tax at source: Your contract income is taxed as salary, with Income Tax and employee NICs deducted before you get paid (kingsbridge.co.uk). You usually cannot take much income as dividends – essentially, you’re taxed as an employee. 

• The client/fee payer also pays employer NICs on your earnings (gov.uk), increasing the cost of hiring you. 

• You might be entitled to some worker rights (like holiday pay) from the agency or umbrella company, given you’re taxed as an employee – though IR35 status itself is a tax determination and does not automatically grant employment rights (hiscox.co.uk). 

• Your take-home pay will typically be lower than if you were outside IR35, because of the extra tax/NIC, so contractors often negotiate higher gross rates for inside IR35 contracts to offset this. 

Public vs Private sector: In the public sector, since 2017, clients have had to assess IR35. If you contract with, say, an NHS trust or local authority (common in social care consulting), they will deduct tax/NIC from your pay if you’re inside IR35. In the private sector, since April 2021 medium or large companies have the same responsibility. For example, if you consult for a large care home group and they deem you inside IR35, they or the recruitment agency will run your payments through payroll. (If you contract for a small private company, IR35 still applies, but you as the contractor must assess and handle your tax – the client doesn’t have to deduct PAYE (hiscox.co.uk). 

Being inside IR35 isn’t necessarily “bad” – it just means you’re taxed like any other employee for that engagement. Many contractors inside IR35 work via umbrella companies or agency payroll to simplify this. The key is that you budget for the higher tax and ensure compliance, so there are no nasty surprises from HMRC. 

What does it mean to be outside IR35? 

If you are “outside IR35,” it means the IR35 legislation does not apply to your contract – you are genuinely operating as an independent business in the eyes of HMRC. In this scenario, you can pay yourself as a company owner in the usual tax-efficient ways, rather than as an employee. Typically, this means you can draw a small salary and take the rest of your income as dividends, which are not subject to National Insurance, and your company profits will be subject to Corporation Tax (at around 19% for small profits). Essentially, you retain the financial benefits of contracting: potentially higher take-home pay than an equivalent employee, after taxes. 

When outside IR35, you (the contractor) are responsible for managing your own taxes. Your client pays your invoices gross to your limited company, and it’s up to you (with your accountant) to ensure you pay the correct amount of Income Tax and NIC via your company payroll or self-assessment. You are not on the client’s payroll, and no PAYE is withheld by the client or agency. This status is preferable from a tax perspective, but it must be genuine – it should reflect a working arrangement where you truly run your own business rather than functioning as an employee. 

Signs that you are operating legitimately outside IR35 include: working with multiple clients or on short-term projects, marketing your services (e.g. having a business website or brand), using your own equipment or tools, having business insurance, and possibly hiring assistants or subcontractors. You also bear some financial risk – for instance, if a client is unhappy with work, you might have to fix it in your own time or could even make a loss on a project. All these are indicators that you are a true independent contractor, not a de facto employee. 

In summary, outside IR35 means: 

• No employment taxes deducted at source: You invoice the client and receive gross payment to your company. Taxation is your responsibility, handled through your company’s payroll and dividends or via self-assessment. 

• Greater take-home pay (legally): You can leverage the contractor tax structure – e.g. salary plus dividends – to minimise National Insurance, etc. This is lawful when your contract truly falls outside IR35. 

• Business responsibilities: You must ensure you pay the correct tax and NIC on your income, and maintain proper business records. You might also invest in professional indemnity or liability insurance, and handle expenses, just like any small business owner. 

• Not entitled to client’s employee benefits or protections: Since you’re not an employee, you generally don’t get benefits like holiday pay, sick pay, pension, or unfair dismissal protection from the client. Your contract should reflect a supplier-client relationship. 

Many contractors and consultants prefer contracts outside IR35 because of the financial benefits and freedom – but it’s critical that the working conditions support that status. Misclassifying an engagement as outside IR35 when it is actually akin to employment can lead to serious tax consequences if HMRC investigates. 

Determining your IR35 status (Are you in or out?) 

How can you tell if you fall inside or outside IR35? Determining IR35 status can be complex, but it boils down to examining the real nature of your working relationship with the client. HMRC will look beyond the contract wording – they examine factors such as how you perform the work, the level of control, and your obligations, to decide if your contract is more like employment or a genuine B2B service. Each contract must be assessed individually; you might have one contract outside IR35 and another that is inside, depending on circumstances (gov.uk). Below are key IR35 status tests used in evaluations: 

1. Substitution (Personal Service): Can you send someone else to do your work? If you have a genuine right to provide a substitute (and the client would accept it), it indicates you are not personally required and thus more likely outside IR35. However, if the client hires you for your specific skills and would not allow a substitute, it implies a personal service obligation – a sign of being inside IR35. In short, the ability to substitute an equally qualified person suggests a true business service, not employment. 

2. Control: Who controls how, when, and where you work? If you have a high degree of control – for example, you set your own schedule, decide how to complete the project, and aren’t supervised closely – that leans toward outside IR35. Conversely, if the client treats you like an employee, directing your daily tasks, hours, or methods, that is a strong indicator of being inside IR35. Being embedded in the client’s organisation with the client managing your work similar to their staff suggests an employment-type relationship.

3. Mutuality of Obligation (MOO): This is a legal concept about ongoing obligation for work and payment. In a typical employment, the employer is obliged to provide work on an ongoing basis and the worker is obliged to accept it – this ongoing “mutual obligation” is present. In a genuine contractor scenario, usually the engagement is for a specific task or time, and once it’s done, neither party is obligated to continue. If your client is required to offer you further work and you are expected to take it, that implies an employment relationship (inside IR35). If you can both walk away after the contract with no expectation of more work, that supports outside IR35. N.B. Often, if the control and substitution tests point to outside IR35, MOO is usually considered not present in an employment sense. 

4. Financial Risk: Do you as a contractor bear any risk of financial loss or opportunity for profit? In business, true contractors typically take on financial risk – for example, you might quote a fixed price and could lose money if a project overruns, or you invest in equipment/training hoping to profit later. If you can make a profit by working efficiently or incur a loss if work isn’t completed within budget, it suggests outside IR35. Employees rarely face such risks (they get paid regardless, and the company covers losses). Similarly, having your own business insurance and being responsible for rectifying defects in your work at your cost are signs of financial risk on you, consistent with contractor status. 

Other factors can also come into play, such as: integration into the client’s organisation (“part and parcel” test) – if you’re viewed as an internal team member (e.g. given a job title, office desk, included in staff meetings and perks) that hints at employment; or conversely if you’re clearly external (not on the org chart, only engaged for a project) it hints at contracting. Provision of equipment: Using the client’s laptop/tools and email vs. using your own equipment can be considered (though this is a lesser factor today). No single factor decides IR35 on its own; the whole picture is considered.

Using HMRC’s CEST tool

For clarification, HMRC provides an online tool called CEST (Check Employment Status for Tax). It asks a series of questions about your contract terms and working practices to gauge whether IR35 likely applies. The CEST tool considers factors like substitution, control, and mutuality. If answered accurately, it can give a determination of “inside IR35” or “outside IR35” for that engagement. However, use it with caution: the tool has been criticised for sometimes ignoring mutuality of obligation and giving indeterminate results in complex cases. Still, it’s a useful starting point and HMRC are likely to stand by the result if the information provided is true and complete. Always answer CEST questions reflecting the actual working practices, not just what the written contract states, to get a correct outcome. 

Every contract is different 

Crucially, assess IR35 status for each contract you take on, before and during the engagement. IR35 status can even change over time if the working conditions drift (e.g. a contract starts outside IR35 but over months the client begins treating you like an employee). Regularly review your status, especially if the project scope or your role changes. Keep documentation – have a contract reviewed by an IR35 expert if possible. Recruitment Panda ® can take care of this for you, with our own knowledge and reference to our Chartered Accountants if necessary. Keep evidence of things like project deliverables, invoices (to show business-to-business nature), and any instances where you exercised your independent contractor freedoms (such as subcontracting or declining additional tasks outside scope). This can be invaluable if you ever face an HMRC enquiry. 

If you are unsure about your status, consider seeking specialist advice. Again, Recruitment Panda ® can take care of this for you, with our own knowledge and reference to our Chartered Accountants if necessary. For added reassurance use your own accountant; and IR35 contract review services exist too. Misclassification can be costly, so it’s worth getting it right up front. 

Final tips and next steps

The bottom line: IR35 can significantly impact how much tax you pay and how you operate as a contractor. Being “inside IR35” means paying taxes like an employee, which can reduce your net income, whereas “outside IR35” allows you to retain the benefits of running a company, but only if your working arrangement truly merits that self-employed status. Given the latest legislation, end clients (except small companies) now play a big role in determining status – but it’s still in your interest to understand the rules and present your engagement correctly. As a management consultant in the social care sector, you may often work with public sector bodies or large care organisations, so be prepared for IR35 assessments as part of the contract process. 

Always review the contract and working conditions for each new role. Use tools like CEST and get professional advice when needed. And remember, compliance is key: it’s better to be correctly inside IR35 and budget for it, than to wrongly assume you’re outside and face a hefty tax bill later. 

For more detailed information, you can refer to official HMRC guidance on off-payroll working (gov.uk). And if you’re looking for new contracting opportunities in health and social care – whether inside or outside IR35 – Recruitment Panda's ® team is here to help. We understand the IR35 considerations and can assist you in finding roles that suit your preferences and expertise. Get in touch with us for friendly advice on your job search or to discuss how IR35 might affect your next contract. 

(This guide is for general information purposes and does not constitute legal advice. Always seek professional advice for your specific circumstances.)