Your understanding is exactly right: IR35 is about whether HMRC would treat you as an employee for tax purposes, even though you're working as a contractor. The key point people miss is that IR35 doesn't make you an employee — it only changes how you're taxed.
Who decides? This is the crucial bit, and it depends on the size of the client:
- Medium or large private-sector clients, and all public-sector clients: the client must assess your employment status and give you a written "status determination statement" saying whether the contract is inside or outside IR35. If it's inside, the fee-payer (usually the agency or the client) deducts Income Tax and National Insurance from your pay before it reaches you — much like PAYE.
- - Small private-sector clients: these are exempt from the off-payroll rules. The responsibility stays with you (your limited company) to decide and account for IR35, and you're paid gross.
So the first thing to establish is the size of the client.
What happens if it's inside IR35? In practice, your take-home drops noticeably. Tax and National Insurance are deducted at source, and you can't take the income as dividends in the usual tax-efficient way. The contract rate is the same, but what lands in your account is less — so factor that into whether the rate is worth it.
Before you sign, ask for and check these:
- A written status determination statement from the client — what is their assessment, and why?
- 2. Run HMRC's own CEST (Check Employment Status for Tax) tool on the working arrangements and compare it with the client's answer. If they disagree, that's a conversation to have now, not later.
- 3. Check the contract terms against reality: substitution clauses, control over how, when and where you work, and mutuality of obligation all matter. But be aware HMRC looks at how you actually work, not just what the paperwork says.
IR35 isn't a reason to walk away from good work — plenty of contractors work inside-IR35 contracts happily — but you do want the rate to reflect the tax treatment before you commit.
