Since they’ve come into force, many business owners and HR managers have found the IR35 rules to be complex and confusing, leaving them with the feeling that they’ve got no choice but to let go of their external contractors or consultants for fear of being heavily penalised. Ben Lindsay, employment associate, aims to dispel key IR35 myths and advises on how contractors can still be hired, without falling foul of the rules.

If you do business with or through a Personal Service Company (PSC) or other similar intermediary business, then you are probably familiar with the recent IR35 reforms.

For those not so familiar, IR35 is a reference to certain tax rules which, since 6 April, have meant that medium and large private sector businesses contracting in this way must take responsibility for determining the tax status of the contractor service provider, whereas in the case of small private sector businesses, the previous rule that the PSC had this responsibility continues to apply.

This question is whether the contractor or consultant is truly working on a self-employed basis or is in effect operating as an employee.

At the time of writing, a survey of 1,850 contractors, by advisory firm Qdos, reported that 65% of contractors had been assessed by their clients as employed for tax purposes or “inside IR35”, which seems to reflect a general position that, despite a long period of prior consultation, there is still a lot of uncertainty or concern in this area.  However, this option is still vital for businesses that need flexibility and benefit from using highly skilled external consultants who can be called on at short notice for a particular project.

The good news is that work can still be done in this way, and properly on an “outside IR35” basis.  Although, whether the arrangement will be one of true self-employment will usually depend on several factors, some of which, hopefully to illustrate this, are considered below.

Must the contractor be able to appoint a substitute to operate on a true self-employed basis?

If the contractor is freely able to appoint a substitute to do the work, then this may indicate that the arrangement is one of true self-employment.

Does it matter how the contractor is paid?

A time spent pay arrangement, such as payment on an hourly, daily or weekly rate basis, may indicate that the contractor is operating like an employee.  Whereas, an arrangement where payment is linked to the completion of a certain task may indicate that the contractor is taking on more financial risk and in doing so operating on self-employed basis.

Does it matter how the contractor introduces themselves to customers or suppliers?

If the contractor presents as if they work for your business, then this would typically be an act more associated with an employee.

Does it matter whether the contractor does similar work for other businesses?  

Generally, the more freedom the contractor has, the more likely they will be truly self-employed.

However, these and the other relevant factors have to be balanced against commercial considerations such as to the extent to which the client wants to protect its own interests.

Overall, it is essential that the contract records the true intentions of the parties and reflects the true day to day reality of their arrangements.


Determining the tax status of a contractor tends to be a technical and fact specific task, but B P Collins can decipher and help with this, whether for the purposes of preparing a Status Determination Statement or challenging one.

The Government has developed an online tool which is designed to determine this status.  The tool, known as CEST (Check Employment Status for Tax) may not necessarily be a perfect solution, but there is associated guidance and HMRC has promised to stand by a determination it produces, providing the inputted details are accurate and the situation doesn’t materially change. Therefore, the tool may not be clear or suitable for some.

However, with the general principle being that a true contractor usually operates with greater freedom and more risk than an employee, these changes do not automatically mean that the market for PSCs is closed.

For further advice, please contact or call 01753 889995.

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