Since 2000, IR35, or the off-payroll working rules, has shaped how contractors are taxed when working through intermediaries like personal service companies.
Its purpose is to prevent tax avoidance where individuals operate as employees in all but name, ensuring they pay similar levels of tax and National Insurance as their salaried counterparts.
Since its introduction, the rules have evolved, and 2025 brings another important update. New changes to company size thresholds will impact who’s responsible for determining IR35 status in certain engagements, a shift that could affect thousands of businesses and contractors across the UK.
What Is IR35 and Why Was It Introduced?
IR35 is shorthand for the UK’s off-payroll working rules. These rules are designed to stop what HMRC calls “disguised employment”, where someone works like an employee but avoids paying the same level of tax by operating through a personal service company (PSC) or other intermediary.
If a contractor is found to be inside IR35, HMRC treats them as if they were an employee for tax purposes. That means their income is subject to PAYE tax and National Insurance contributions, just like a standard employee’s salary would be.
The intention behind IR35 is to ensure that people who work in similar ways to employees pay similar levels of tax, even if they invoice through a company structure.
When Did IR35 Rules Change?
The IR35 legislation has gone through several major changes since it was first introduced. In the public sector, reforms in 2017 shifted the responsibility for deciding IR35 status from the contractor to the hiring organisation.
This change was extended to the private sector in April 2021 but only for medium and large businesses.
In April 2025, another key update was announced: the financial thresholds that define whether a business counts as ‘small’ are increasing. That means some companies who previously had to determine IR35 status for their contractors will now pass that responsibility back to the contractor themselves.
This latest change could significantly affect compliance responsibilities, especially for businesses on the border between small and medium size, or for contractors taking on new work in 2025 and beyond.
IR35 Status – Who Determines It and When?
What Are the Current IR35 Rules?
One of the most important aspects of IR35 is understanding who’s responsible for deciding whether the rules apply and that depends on who’s hiring you.
If you’re working with a medium or large business, the client is responsible for assessing your IR35 status. They must decide whether your contract looks like employment or genuine self-employment and they’re also responsible for deducting tax and National Insurance at source if IR35 applies.
But if you’re working with a small business, you (the contractor) are responsible for making that determination. You must assess the contract, decide if it falls inside or outside IR35, and ensure you’re paying the correct tax accordingly.
This split applies in the private sector. In the public sector, the rules are stricter. All public bodies, regardless of size, must determine the IR35 status of their contractors.
If you’re working with a group company e.g. a subsidiary of a larger parent company, the rules can get a little more complex. Even if the subsidiary appears ‘small’ in isolation, if the parent company is medium or large, then IR35 must still be applied, and the responsibility for determining status sits with the business hiring you.
Changes to IR35 in April 2025
From 6 April 2025, the government is increasing the thresholds used to define what counts as a “small” company. This matters because only small companies are exempt from having to assess IR35 status.
A business will be considered small unless they breach two of the conditions below, being over in one is not enough to make them medium companies:
- Turnover: up to £15 million (previously £10.2 million)
- Balance sheet total: up to £7.5 million (previously £5.1 million)
- Staff: 50 or fewer (unchanged)
As a result of these changes, some companies that were previously classified as medium-sized will now qualify as small and that means the responsibility for IR35 status will shift back to the contractor.
If you’re a contractor, this could increase your risk. You’ll need to review contracts more carefully, keep stronger documentation, and be confident in your own IR35 assessments.
If you’re a business, it might mean fewer admin burdens but the reputational and operational risks still need managing.
Key Criteria for Assessing IR35 Status
The 7 Main Factors HMRC Considers
When assessing whether a contract falls inside or outside IR35, HMRC looks beyond the paperwork. It’s not just about what’s written in the agreement, it’s about how the working relationship plays out in real life.
Here are the seven key areas HMRC will focus on:
- Control: Who decides when, where, and how the work is done? If the client is calling all the shots, that leans more towards employment.
- Substitution: Can the contractor send someone else to do the job in their place? True contractors usually can.
- Mutuality of Obligation: Does the client have to keep offering work? Is the contractor expected to keep accepting it? A mutual expectation of ongoing work points to employment.
- Financial Risk: Is the contractor taking on genuine business risk — for example, buying their own insurance, fixing their own mistakes, or not getting paid for unsatisfactory work?
- Equipment and Integration: Employees often use company equipment and are part of the team. Independent contractors tend to bring their own tools and work more independently.
- Payment Structure: Contractors are generally paid on a project basis or per milestone, rather than a regular salary or hourly wage.
- Multiple Clients / Business-on-Own-Account Test: A contractor working for multiple clients is more likely to be self-employed than someone working solely and consistently for one business.
No single factor on its own determines IR35 status, HMRC will weigh up the full picture.
How to Use the CEST Tool
To help with status assessments, HMRC provides a tool called CEST – Check Employment Status for Tax. It’s free, anonymous, and available on the HMRC website.
The tool asks a series of questions about your working arrangement, including how you’re paid, whether you can provide a substitute, and how much control your client has. At the end, it provides an indication of whether IR35 is likely to apply.
But here’s the catch: CEST isn’t perfect. It’s been widely criticised for failing to properly consider Mutuality of Obligation, which is one of the most important indicators of employment.
That’s why we always recommend treating CEST as a guide, not gospel. If you’re unsure, or your situation is a bit of a grey area, it’s worth getting expert advice to make sure you’re not leaving yourself open to penalties or unexpected tax bills.
IR35 Tax Implications for Contractors
Inside vs Outside IR35
If you’re inside IR35, HMRC sees you as an employee for tax purposes, even if you’re operating through your own limited company (or PSC). That means you’ll need to pay Income Tax and National Insurance as if you were on payroll.
When you work with a medium or large business, the client must deduct tax and employee NICs before paying you just like they would with a regular employee.
You’ll also miss out on some of the tax efficiencies that normally come with running your own company.
But if you’re working with a small company, you are responsible for determining your own IR35 status. If your contract falls inside IR35, you’ll need to calculate and pay the correct tax yourself, including:
- Income Tax under PAYE rules
- Employee National Insurance contributions
- Possibly even employer NICs via a deemed payment calculation
IR35 Tax Changes and Financial Risk
Being inside IR35 means more than just higher tax bills, it also means less control over how and when you’re paid.
Your income is treated like a salary, meaning PAYE tax and Class 1 NICs are deducted at source. You can’t claim as many expenses, and you’ll no longer be able to take income in the form of tax-efficient dividends.
For businesses hiring contractors, IR35 adds extra cost too. If a contractor is inside IR35, the client may also owe employer’s National Insurance, currently 15% (as of 2025/26). Over time, that can make contractors more expensive than permanent staff.
And then there’s the risk of misclassification. If HMRC later decides a contract should have been inside IR35, it can demand backdated tax, interest, and even penalties. That’s why getting it right from day one is so important for both parties.
HMRC Compliance Checks and What to Expect
IR35 Investigations and Enquiries
If HMRC suspects that IR35 has been applied incorrectly, whether by a contractor or a client, they can open an enquiry.
You might be flagged due to a discrepancy in your tax return, a tip-off, or simply as part of a routine compliance check. HMRC will usually ask for:
- A full explanation of how IR35 status was determined
- Copies of written contracts and agreements
- Details of how the work was actually carried out day-to-day
This is where many businesses and contractors run into trouble. Even if a contract looks fine on paper, HMRC will look at real working practices, for example, did you follow the client’s schedule, or use their equipment? Were you treated like an employee?
Keeping clear documentation and reviewing contracts regularly is key to staying compliant and avoiding unexpected tax bills.
Disputes and the Appeals Process
If HMRC decides you’ve misapplied IR35, they’ll issue a ruling but that doesn’t mean the case is closed.
You have the right to object and submit your reasoning. HMRC will then review your response and may revise their decision. If not, they’ll issue a final ruling — and at that point, you can appeal through a tax tribunal.
If the appeal is unsuccessful, HMRC can demand:
- Repayment of underpaid Income Tax and NICs
- Interest on overdue payments
- Penalties, especially if they believe you didn’t take “reasonable care” or intentionally misled them
This is why working with a tax adviser is so important. A professional can help you make a robust case from the outset and, if needed, support you through any appeal or tribunal process.
What Businesses Need to Do in 2025
Reassess Company Size Classification
From April 2025, the thresholds that define a “small” company are increasing and this could have big implications for your IR35 responsibilities.
Under the new rules, a company is classed as “small” if it meets at least two of the criteria below:
- Turnover of up to £15 million
- A balance sheet total of up to £7.5 million
- 50 employees or fewer (unchanged)
If you’re now considered small, responsibility for IR35 checks shifts back to the contractor. But if you remain medium or large, you must continue assessing contractors’ IR35 status and applying PAYE when required.
Group structures must be especially careful if your parent company is medium or large, subsidiaries don’t automatically qualify as small, even if they meet the thresholds individually.
Take time to review your latest accounts and headcount to confirm your status under the updated rules. Then, make sure your internal processes including contracts, onboarding, and payroll reflect your obligations going forward.
Best Practices for Hiring Contractors
The safest route is to stay consistent and well-documented. Always use clear, written contracts that reflect the actual working arrangement, not just a standard template.
If you’re making a status determination, keep a record of how and why you reached your conclusion, including evidence from tools like CEST or professional advice you received.
If in doubt, don’t guess. A misjudged IR35 call can lead to years of backdated tax, interest, and penalties, not to mention reputational damage. That’s why many businesses turn to tax experts like Ryans to help assess contracts and working practices before onboarding a contractor.
IR35 and the Future – Will IR35 Be Scrapped?
Calls for Reform or Repeal
Since IR35 was introduced back in 2000, it’s faced years of criticism from both contractors and businesses. Many argue that the rules are too complex, too subjective, and penalise genuine freelancers who aren’t “disguised employees.”
Campaigns like OffPayroll.org and lobbying from trade bodies like IPSE and the FSB have repeatedly called for IR35 to be scrapped or at the very least, overhauled to provide more clarity and fairness.
But despite ongoing pressure, IR35 is still very much in place.
What to Expect Moving Forward
The government continues to defend the rules as a necessary measure to ensure fairness in the tax system, particularly when it comes to contractors working in long-term, full-time roles through a PSC.
That said, there could be future reviews into how IR35 is applied, especially around the use of the CEST tool, the burden on businesses, or the definition of “employment” for tax purposes.
For contractors and clients alike, the best approach is to stay informed, stay compliant, and seek expert advice when navigating contracts or disputes.
IR35 FAQs
What are the latest IR35 rule changes in 2025?
The April 2025 update increased the financial thresholds for what counts as a “small” company. As a result, more businesses will now be classed as small, shifting IR35 status determination back to the contractor in those cases.
Who decides IR35 status – contractor or client?
It depends on the size of the hiring company. Medium and large businesses must assess IR35 status, while contractors remain responsible when working with a small company.
What is the new company size threshold for IR35?
As of April 2025:
- Turnover must be £15 million or less
- Balance sheet total must be £7.5 million or less
- Staff headcount must be 50 or fewer
Meeting two or more of these three conditions qualifies a business as “small.”
How does HMRC investigate IR35 compliance?
HMRC may open an enquiry if they suspect IR35 has been misapplied. They’ll request contracts, tax calculations, and evidence of working arrangements and may follow up with formal interviews or assessments.
What are the penalties for getting IR35 wrong?
If IR35 applies and hasn’t been followed correctly, HMRC can demand backdated tax, interest, and penalties. If they believe you failed to take “reasonable care,” penalties can be more severe.
Can I challenge an IR35 decision by HMRC?
Yes. You can first raise an objection directly with HMRC. If unresolved, you have the right to appeal the decision through a tax tribunal.
Is the CEST tool enough to prove my IR35 status?
CEST can be useful, but it’s not foolproof, especially since it doesn’t fully consider “mutuality of obligation.” It’s best to use it alongside professional advice and a full review of the working arrangement.
How Ryans Can Help with IR35
At Ryans, we understand how tricky IR35 can be for both contractors and the companies hiring them. We help clients:
- Review contracts and working practices
- Determine IR35 status with confidence
- Defend against HMRC enquiries and compliance checks
- Stay compliant with evolving tax and employment legislation
Whether you’re navigating April 2025’s changes or dealing with a current contract under scrutiny, we’ll help you stay on the right side of the rules.
Get in touch today to speak to one of our tax experts and take the stress out of IR35.