What IR35 is — and the history behind the rules
IR35 takes its name from an Inland Revenue press release issued in 1999 — Inland Revenue 35 — which announced HMRC's intention to tackle what it called “disguised employment.” The concern was that workers who, in substance, worked like employees were using limited company structures to pay significantly less tax than equivalent PAYE employees. By paying themselves a small salary and extracting most income as dividends — which attract no National Insurance — contractors could retain considerably more of their earnings than employed equivalents doing the same work.
The original rules (Chapter 8 of ITEPA 2003) placed the burden of status determination on the contractor's own personal service company. If the work would have been employment had it been performed directly, the company was required to operate PAYE on the “deemed payment” equivalent. In practice, compliance was low — HMRC estimated that only a small fraction of contractors who should have been caught by the rules were actually applying them.
The rules were fundamentally reformed in April 2017 for public sector engagements and April 2021 for medium and large private sector engagements. These reforms — now known as the off-payroll working rules (Chapter 10 of ITEPA 2003) — shifted the determination responsibility from the contractor's company to the engager. This change transformed the IR35 landscape for Harrow contractors working at large London-based clients, most of whom now operate under employer-issued Status Determination Statements.
The three primary IR35 status tests
Whether a contractor is inside or outside IR35 is assessed against the same common law employment tests that courts have used for decades to distinguish employment from self-employment. HMRC's Employment Status Manual (ESM) applies these tests to the hypothetical contract — the question is whether, absent the intermediary company, the worker would have been employed. Three tests carry the most weight:
Control
Does the engager control how, when, and where the work is performed? A contractor who is told which hours to work, which tools to use, and which methods to follow is showing signs of employment. A contractor who is engaged to deliver a defined outcome and controls their own working methods and schedule shows signs of genuine self-employment. In practice, many Harrow contractors working at financial services clients in the City face significant day-to-day direction that makes the control test difficult to satisfy.
Right of substitution
Can the contractor genuinely send a suitably qualified substitute to perform the work if they are unavailable? A real, unfettered right of substitution is one of the strongest indicators of self-employment. However, the right must be genuine — not a clause inserted into a contract that neither party intends to exercise. HMRC scrutinises substitution clauses carefully, looking at whether a substitute has ever been sent, whether the client would realistically accept one, and whether the clause in the contract matches the actual working arrangement.
Mutuality of obligation
Is there a mutual expectation that the engager will continue offering work and the contractor will continue accepting it? Long-running engagements where a contractor has worked at the same client for several years, with rolling extensions and no genuine risk of the work ending, can indicate employment-like mutuality. By contrast, project-specific engagements with a defined end date and no expectation of extension are more consistent with self-employment.
Secondary factors that support self-employment include providing your own equipment, taking genuine financial risk (fixed price contracts where cost overruns come from your profit), working for multiple clients simultaneously, and not being integrated into the client's workforce (separate email domain, not appearing on the company org chart, not attending internal-only meetings).
Who determines IR35 status in 2024/25
The answer depends on the size of the engager. HMRC uses the Companies Act small company thresholds to define which businesses are in scope of the 2021 off-payroll rules.
| Engager size | Who determines status | Rules applying |
|---|---|---|
| Small private sector company | The contractor's own PSC | Chapter 8 ITEPA 2003 (original IR35) |
| Medium/large private sector | The engager (fee-payer) | Chapter 10 ITEPA 2003 (off-payroll rules) |
| All public sector bodies | The engager (fee-payer) | Chapter 10 ITEPA 2003 (since April 2017) |
For contractors based in Harrow working at medium or large London-based clients — financial services firms in Canary Wharf, technology companies in the City, NHS trusts across North West London — the engager is responsible for issuing a Status Determination Statement and, if the determination is inside IR35, for operating PAYE and NI deductions at source before paying the contractor's company. The contractor's company then receives the net payment and can still pay itself a small salary and minimal dividends from any other outside-IR35 income, but the inside-IR35 income has already been taxed as employment income.
Inside vs outside IR35: what it means in practice
The tax difference between inside and outside IR35 is significant. The table below illustrates the approximate position for a Harrow contractor earning £80,000 per year through a personal service company.
| Tax component | Outside IR35 | Inside IR35 |
|---|---|---|
| Income tax | ~£13,500 | ~£19,400 |
| National Insurance | ~£3,800 | ~£8,200 |
| Corporation tax | ~£7,600 | ~£0 |
| Estimated take-home | ~£55,000 | ~£52,400 |
Illustrative only. Based on 2024/25 rates. Salary set at personal allowance for outside-IR35 scenario. Actual figures depend on pension contributions, other income, and specific company structure.
The CEST tool: what it does and does not tell you
HMRC's Check Employment Status for Tax (CEST) tool is a free online questionnaire that produces an indicative IR35 status determination. HMRC commits to standing behind CEST results where the information entered is accurate and the actual working arrangements match the responses given.
CEST has significant limitations that Harrow contractors and their engagers should understand. First, it does not ask about mutuality of obligation directly — a cornerstone of employment status case law. HMRC has consistently argued that MOO is implicit in any contract, but tribunals have disagreed. Second, CEST produces an “unable to determine” result in a significant minority of cases — particularly where the working arrangement has features of both employment and self-employment. This result provides no legal protection.
The most important point: CEST can be a useful starting point, but it should not be treated as a substitute for a professional IR35 review. A specialist accountant or IR35 consultant who reviews the actual contract and working practices — not just hypothetical answers to an online questionnaire — provides a far more defensible basis for an outside-IR35 position.
Disputing an inside-IR35 determination
If your engager issues a Status Determination Statement with an inside-IR35 determination that you believe is wrong, you have the right to challenge it through a formal disagreement process. The engager is required to have a process in place for receiving and responding to challenges.
Submit a formal written disagreement
Set out in writing why you believe the determination is incorrect, referencing the specific factors — substitution rights, control arrangements, financial risk — that support an outside-IR35 position. Be specific and factual, not general.
Engager has 45 days to respond
The engager must consider your representations and either confirm the original determination (with reasons) or issue a revised SDS. If they fail to respond within 45 days, the liability for any unpaid tax shifts to the engager — a strong incentive for them to engage with the disagreement process seriously.
Escalate to HMRC if unresolved
If the engager maintains an inside determination that you continue to dispute, and tax is subsequently assessed, you can appeal the assessment to the First-tier Tax Tribunal. These cases are complex, expensive, and slow — professional legal and accountancy representation is essential from this point.
Consider your options going forward
Even if you lose the dispute for a past period, the outcome informs your decision about whether to continue the engagement. Some Harrow contractors renegotiate contracts with strengthened substitution provisions and reduced supervision, while others find new engagements that are genuinely outside IR35.
IR35 and your Self Assessment return
IR35 status has a direct and significant impact on how income is declared on the annual Self Assessment return. The interaction between inside and outside IR35 income, limited company salary and dividends, and the personal tax return is one of the most complex areas of personal taxation for Harrow contractors.
Where a contractor has income from both inside and outside IR35 engagements in the same tax year — which is common among Harrow contractors with multiple clients — the Self Assessment return must correctly reflect the PAYE already deducted on inside-IR35 deemed payments, the salary and dividends drawn from the limited company, and any personal income from outside-IR35 contracts where income has flowed through the company without PAYE deduction.
Getting this reconciliation right requires the personal tax return to align precisely with the company's accounts and payroll records. HMRC's Connect system cross-references all three sources of data. Discrepancies — even innocent ones — can trigger compliance checks that are disproportionately time-consuming to resolve.
A Harrow accountant who specialises in contractor taxation will prepare the Self Assessment return in alignment with the company accounts, ensuring that inside and outside IR35 income streams are correctly reported and that no PAYE credit is missed or double-counted.
Self Assessment Tax Returns in HarrowCommon IR35 questions from Harrow contractors
What is IR35 and who does it affect?
IR35 (off-payroll working rules) ensures contractors who work like employees pay broadly the same tax as employees. It primarily affects contractors operating through personal service companies providing services to medium, large, or public sector clients.
Who determines my IR35 status?
If your client is a medium or large private sector company, or any public sector body, they determine your status and issue a Status Determination Statement. If your client is a small private sector company, you determine your own status.
Can I work both inside and outside IR35?
Yes. You can have simultaneous or sequential engagements with different IR35 status. Your personal service company receives net income (after PAYE deduction) from inside-IR35 clients, and gross income from outside-IR35 clients. Both must be correctly reconciled on your Self Assessment return.
What is a Status Determination Statement?
An SDS is the written determination issued by a medium or large engager stating whether your engagement is inside or outside IR35, with the reasoning behind that conclusion. The engager must provide it before engaging you and must pass it along the contractual chain.
Can HMRC investigate past years under IR35?
Yes. HMRC can open compliance checks into prior years where they believe IR35 should have applied. The standard time limit is four years, extending to six years for careless errors. Harrow contractors who were not applying Chapter 8 correctly before 2021 may still face historic investigations.
This guide reflects HMRC's off-payroll working rules as of April 2026. Key references: HMRC IR35 guidance, HMRC Employment Status Manual. Tax rules change — verify current thresholds with HMRC or a qualified accountant.