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A Professional Contractor’s Guide to the IR35 Legislation

The aim of this article is to provide a clear guide to the IR35 legislation which was originally enacted in April 2000 in order to ensure that workers engaged in ‘disguised employment’ pay the same level of tax as employees. 

The IR35 legislation was intended to protect workers from being deprived of employment rights but is clearly aimed at professional contractors who are lawfully paid dividends by their own companies. 

The IR35 legislation is set out in s.49 Income Tax (Earnings and Pensions) Act 2003, specifically: 

(1) This Chapter applies where-

(a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (“the client”),

(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and

(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client. [emphasis added] 

By breaking down the above legislation into its component parts it is clear that a professional contractor using a limited company can operate outside IR35 if there is a genuine and enforceable right to use a substitute to provide the services and, crucially, the actual working practices (i.e. the ‘circumstances’ referred to in the legislation) suggest self-employment. Clearly, it is dangerous to rely on a substitution clause on its own however well drafted. 

The IR35 legislation brings into play employment status case law developed over the last century to guide HM Revenue & Customs in deciding whether the circumstances suggest a relationship of self-employment or deemed employment. It is important to note that the criteria for assessing whether IR35 should apply or not overlap significantly and we would recommend getting your contract and working practices reviewed by a legally trained specialist (see F.A.Q.s). Remember, to reach a decision on whether IR35 should apply or not requires a detailed examination of all the circumstances in the light of case law. A review of the contract terms only should therefore be avoided.


Does the contract allow you to select and pay for an alternative skilled and qualified individual to provide the services on your company’s behalf? A right to substitute is not likely to be genuine if the client has the final say or the contract and other evidence indicates that in reality the client requires you to provide the services personally. In addition, even if substitution takes place during an engagement HM Revenue & Customs may decide that IR35 should apply to the remainder of the engagement if the working practices do not support an interpretation of self-employment.

Mutuality of obligations

Does contract place an obligation on the client to provide work and for the professional contractor to accept and undertake the work? A contract for a fixed period of time at a fixed daily rate is much more likely to be caught by the IR35 legislation. Conversely, if the work is structured as a genuine project then HM Revenue & Customs cannot argue that once the project is complete there is an ongoing obligation for the client to provide work and for the professional contractor to be paid. 


A high level of control over how, when and where the professional contractor provides the services would indicate that the engagement is caught by the IR35 legislation. However, there is scope for argument that for practical reasons the work can only be completed at the client’s site so it would not be accurate to find that the client is exercising arbitrary control. 

Length of the engagement

Cases such as Dragonfly indicate that a long term engagement with one client suggests that IR35 should apply. In this case the contractor was described as being ‘part of the furniture’. However, this is not appropriate in defence industry projects which may last for many years, for example, the Datagate case (see articles published on the internet by The Law Place’s director Martyn Valentine). Ideally, the length of the engagement should be linked to completion of the services in order to reduce mutuality of obligations (see above). 

Provision of equipment

Do you have the right to provide your own equipment or does the client expect to control this? This is not relevant if you cannot use your own laptop, for example, if the work is subject to national security restrictions. 

Basis of payment

Will you be paid at regular intervals like the client’s employees or only on the basis of actual work done? The latter would suggest that there is no continuing obligation on the client to pay you. If you don’t work for a period of time would you expect the client to pay you? 

Employee benefits

Would you be entitled to employee benefits like sick pay, use of employee facilities and attendance at corporate events like Christmas parties? If so, HM Revenue & Customs are likely to view you as being ‘part and parcel’ of the client’s business rather than a genuinely independent contractor. 


Would you be expected to correct defective work at your own expense and in your own time? Could you make a loss on the engagement? Are you expected to show that your company has professional indemnity insurance in place to meet its potential liabilities? 

Opportunity to profit

Can you provide services to other clients concurrently? Can you profit by paying a substitute a lower rate of pay? Cases such as Datagate suggest that HM Revenue & Customs has taken a restrictive approach in this respect and a professional contractor can help help demonstrate self-employment if she/he has organised the workload for lifestyle purposes rather than for pure profit. 


Can the contract be terminated without notice under any circumstances? For commercial reasons contracts often provide for termination on reasonable notice by either party. This is unlikely to be an issue if there is no obligation on the professional contractor to provide the services during the notice period. 

The criteria listed above are intended for guidance only and if you have any questions please contact us. 
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