Contractors: What is the difference between Inside IR35 and Outside IR35?

Unsure if you’re inside or outside of IR35? Don’t panic, you’re not the only one. Despite the tax reforms taking place in the private sector in just a few short months’ time, an alarming number of contractors are still uncertain about what these statuses actually mean and how it affects them.


First introduced back in 2000, IR35 in its simplest form is anti-avoidance tax legislation issued by HMRC. It’s designed to stop certain independent contractors from taking advantage of favourable taxation by providing services through a limited company or by other means. In these situations, both the contractor and the client can avoid, reduce, or limit certain tax payments and NI contributions.

Having already been rolled out into the public sector in 2017, IR35 is now set to be implemented into the private sector on 6th April 2021, after a 12-month delay due to the pandemic. While it has traditionally been the responsibility of the limited company (or contractor) to determine whether a contract is inside or outside of IR35, this reform is now giving this responsibility to the end client.

If you’re an independent contractor in the private sector, it's crucial that you understand the IR35 status system before they come into play this April. So, to help you out, we’ve created this simple guide to help you learn the key difference between being inside or outside of IR35.

Inside IR35

If you are found to be working inside IR35, you’ll be regarded as an employee for tax purposes. This means that you have the same responsibilities or benefits as someone who is a permanent employee and you’ll be expected to pay the same amount of national insurance and tax as they do. You’ll also be subject to PAYE and have the correct funds deducted from your pay each month. Even though you'll be considered an employee for tax purposes, you will have none of the statutory employment rights associated with traditional workers.

HMRC will also raise a determination for the income tax, NICs, interest, and potentially a penalty which should have been paid during the year in question. This has the potential to run into the tens of thousands of pounds, depending on how many contracts you’ve had during this time period.

Outside IR35

If you are found to be working outside IR35, you are considered to be operating as a genuine business and therefore, outside of IR35 rules. In other words, nothing changes. You can continue to pay yourself a salary, draw the remainder of income as dividends and remain responsible for your own taxes. Understandably, this is the more preferable option for many contractors working in either the private or public sector.

Determining IR35 status

Now you have a greater understanding of the differences between being inside and outside of IR35, it’s useful to also understand how IR35 status is determined by HMRC. A number of factors are taken into consideration to determine IR35 compliance and these are considered separately for each contract per client. Here are some of the key factors HMRC consider during this process.

Direction supervision and Control (DSC)

Your contract should clearly state that you have control as an independent contractor. This means that you are not supervised by someone else and you are in full control of every aspect of the services you provide, such as choosing your work schedule and providing your own equipment.

Mutuality of Obligation

Mutuality of Obligation, otherwise known as MOO, is a term whereby an employer must provide regular work to their employees and the employees must agree to undertake this work. However, as a contractor, there should be no expectation of continued work. If work is expected continually, HMRC may decide that you are now an employee, under MOO terms. Therefore, to remain IR35 compliant, MOO must not be present.

Financial Risk and Reality

As a contractor, you’re responsible for the management of your business’s finances. While employees are paid a fixed salary regardless of their employer’s profits and losses, a contractor is exposed to more financial risks, such as reduced fees incurred by finished unexpectedly early.

In addition to financial risk, HMRC can also look into the method of payment from your end client as an indicator of your compliance. This can range from negotiations of rate to invoicing and expenses.

Hopefully, you should have a far greater understanding of the differences between being inside IR35 and outside IR35. It can seem like a lot to take it, but this new knowledge will help you to better prepare yourself for when the changes come to fruition in April.

If you’re still unsure about IR35 and what you need to do ahead of the private sector reform in April, get in touch with the Vantage team here, or download our guide to IR35 

For the latest contract roles, click here.

Share this:

1st August

industry-news Career Advice