If you’re a first time contractor, IR35 is one of the most important things to get right before you set up a limited company to contract through (sometimes called a Personal Service Company, or “PSC”). Incorporating a company is quick and straightforward, and it comes with attractive tax advantages if used correctly. You can pay yourself through a mix of salary and dividends, and the company limits your personal liability in a way that working as a sole trader doesn’t.

IR35 isn’t a one-off decision when you incorporate – it must be considered separately for every engagement you take on, for as long as you contract through your limited company.

The IR35 risk

IR35 carries significant risk, and the costs of getting it wrong can be substantial. If HMRC later concludes an engagement was inside IR35 and reasonable care wasn’t taken to establish otherwise, you (or your client – see more below) can be liable for the associated tax and National Insurance, plus interest and possibly penalties, and these figures can run into the tens of thousands for a single engagement.

The following checklist provides some guidance on what you need to know and do before you start, how to demonstrate you’re genuinely in business, and how to stay on top of your position once the engagement is underway.

• Remember, you’re starting a business, not just a job. Working through a limited company only really benefits you if you work with your clients in a genuinely self-employed manner. As a director you take on fiduciary duties and responsibility for the company’s accounts and tax affairs, and your company should look and operate like a genuine business, not just a vehicle for invoicing a client. You can help to demonstrate you are genuinely in business with features such as a company website and/or a business LinkedIn page, business insurance, marketing, your own office and equipment, and ideally other clients and/or income streams.
• Appoint a reputable accountant. Get proper advice and support with your company’s running costs, accounts and tax affairs from the outset.
• Establish who decides your IR35 status – you, or your client. This depends entirely on your client’s size and location, not on the contract itself. Under Chapter 8 (IR35 in its original form) you decide your own status and carry the liability if it’s wrong; under Chapter 10, also known as the Off-Payroll Working rules, your client decides and must issue a Status Determination Statement (SDS) confirming its decision. See our full guide on Chapter 8 vs Chapter 10 IR35 for how to work out which applies to you, because everything else on this checklist depends on getting that right first.
• If Chapter 10 applies, make sure you receive a Status Determination Statement (SDS) before you start. Your client must provide this, setting out its IR35 decision and reasoning, and we recommend you do not sign any contracts until you have it. Check it reflects your actual working practices, not just the contract wording, and ensure you keep a copy on file.
• Check your written contract carefully. Your written contract is the first thing that would be looked at in an IR35 investigation, so it is very important to ensure it supports your position. Pay particular attention to clauses on control, substitution, mutuality of obligation and delivery risk, and consider engaging a specialist to review it if you are unsure. An independent review of your contract and working practices is excellent evidence to demonstrate reasonable care.
• Make sure your working practices match your contract. An outside IR35 contract will not protect you if the reality says something different. HMRC and the courts always consider the reality of the arrangements and the overall relationship, not simply contractual wording.
• Keep a record of your IR35 position and the evidence behind it. This includes the SDS where one applies, your contract, and the evidence to support your own decision where Chapter 8 applies. This will help significantly if HMRC select you for an enquiry at some point down the line.
• Continually monitor your position. IR35 status isn’t guaranteed throughout the whole contract. If your working practices change, you take on additional work, your contract is amended or extended, or your client’s size changes, your position may need to be reassessed.

IR35 FAQs for the first time contractor

My agency told me my contract is IR35 friendly, should I take this at face value?

Agencies aren’t typically IR35 specialists, and “IR35 friendly” contract wording only protects you if your actual working practices align with it. Ensure you have established the position for both.

What if my first client is a small company or wholly overseas, is IR35 still relevant?

Chapter 8 applies, and the responsibility for deciding your status sits with you, not your client. See our guide on Chapter 8 vs Chapter 10 IR35 for what that means in practice.

If my client decides my IR35 status, am I free of risk?

Not entirely. Where Chapter 10 applies, the client is responsible for making the IR35 determination and the fee-payer is generally responsible for operating PAYE where the engagement is inside IR35. However, you should still make sure the SDS accurately reflects the contract and actual working arrangements, and that you don’t sign up to any tax indemnities in your contract. Your own company also remains responsible for its wider tax, accounting and company obligations, so an SDS does not remove all risk associated with the engagement. Read 5 key checks you should make if your client says you’re outside IR35.

What are the most important factors for being outside IR35?

There is no single test. The key factors usually include personal service/substitution, control, mutuality of obligation, financial risk and whether you are genuinely operating a business on your own account. The overall picture must be considered.

Do I need a right of substitution to be outside IR35?

Not necessarily, but a genuine right of substitution that can realistically be exercised is a very strong indicator of self-employment. Simply inserting wording into the contract that would never be accepted in practice is of no value.

What should I do if I disagree with an SDS?

If your client is responsible for your IR35 status under Chapter 10, you can appeal using the client’s statutory status disagreement process. Explain why you believe the determination is incorrect and provide representations supporting your argument. The client must consider your representations and respond within 45 days.

Does having several clients automatically mean I am outside IR35?

No. Having multiple clients is helpful evidence that you are genuinely in business, but IR35 is considered separately for each engagement. You could therefore be outside IR35 for one client and inside for another.

Contracting through a limited company for the first time doesn’t need to be daunting once you know what to look out for and are equipped to deal with any issues that arise. Contact us today if you need support.

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Visit our IR35 Hub for further IR35 / Off-Payroll Working guidance.