What is IR35 and how does it affect freelancers?

IR35 is a piece of legislation with the purpose to eradicate the practise of an individual providing services to a company as a Contractor, when in fact they are existing as an employee.

The importance of this has led to many contractors wondering if their work falls in or outside IR35 as the tax implications if found to be within the IR35 status can be considerable on the contractor.

Below are the main indicators of IR35 status and should be considered when developing a contract between a contractor and client.


Substitution is one of the three main indicators of IR35 status used by HMRC to determine a contractor’s employment status.

In the case of a employee, the employee themselves must complete all the work given to them by their employer. They cannot give the work to a third party outside the organisation. In this case there can be no “Substitution”. If a contractor is seen to be working in this way, they would usually be classed as a “disguised employee” and fall within IR35 legislation.

In a standard contractor / client scenario, a contractor will be free to outsource their services to a third party, as long as the terms of the contract are not violated and the cost to the client is not affected. In this case Substitution is perfectly acceptable, and if a contractor is free to “substitute” themselves for a third party, they are usually deemed to be outside IR35 legislation.

Mutuality of Obligation

Mutuality of Obligation refers to the relationship between a contractor and his/her client.

In the case of a regular employee, an employer is required to ensure the employee has work to carry out at all times. This is their obligation to their employee. In turn, the employee is required to complete any work (within reason) they are given – that is their obligation to their employer. Hence, they have a mutuality of obligation.

In the case of a contractor, a client will supply a single piece of work. Outside this single project, the client has no obligation to supply further work, and once the project is finished the contractor is not required to accept any further work. There is no mutuality of obligations between the two parties in this situation.

If a mutuality of obligation exists between a contractor and a client (i.e. if a client is obligated to provide a contractor work on an ongoing basis), HMRC would usually deem that contractor to be inside IR35 legislation, and as such would be a “disguised employee”.

What, Where, When and How Tests (Direction and Control)

What, Where, When and How Tests (Direction and Control) are simple tests used by HMRC to determine if a contractor’s employment status falls within the realms of the IR35 legislation.

In the case of a regular employee, an employer would give instructions on ‘What’ work is required to be carried out, ‘Where’ within the organisation it is to be carried out, ‘When’ it must be completed by and ‘How’, the methods used to carry it out.

In the case of a contractor, these controls would usually be undefined. The ‘What’ may be more general such as a project and not specific tasks, the ‘where’ would not usually matter, some work may be at the client’s premises and some the contractor’s, the ‘When’ would not normally be broken down to specific tasks although the project may have a defined timeline and the ‘How’ is more often than not down to the contractor to decide.

Being “In Business On Your Own Account”

To not be classed as a “disguised employee”, a contractor must be able to prove they operate as a separate business. This may include;

  • Having their own Marketing & Website
  • Managing their own time
  • Purchasing of resources and either absorbing the costs in the rate or charging on specific items to the client
  • Contracting with more than one client
  • Taking financial risks to stay in business