IR35: Back to Basics. What to do when hiring a contractor?

When you need specialist expertise or extra hands for a project, hiring a contractor can be an excellent solution. But if you're new to working with contractors, you might have heard about something called "IR35" and wondered what it means for your business.

What Is IR35?

IR35 is a set of UK tax rules that determine how contractors should be taxed when they work for your business.

For example, if someone is working for you like an employee (same hours, same supervision, same expectations), they should pay tax like an employee, even if they operate through their own limited company.

IR35 exists to make sure people aren't avoiding tax by calling themselves contractors when they're really working as employees.

When Is IR35 Required?

IR35 applies whenever you hire someone who works through their own limited company or personal service company (PSC) rather than as a direct employee or through an agency's payroll.

If you're a medium or large business, you need to assess IR35 status for every contractor engagement. Small businesses are currently exempt from these rules, meaning the contractor handles their own tax status.

Not sure if you're exempt? Find out here.

Inside or Outside IR35: What's the Difference?

This is the core question you need to answer for each contractor.

Inside IR35 means the contractor works like an employee for tax purposes.

• You deduct tax and National Insurance through PAYE (like a normal employee)
• The contractor doesn't get employment benefits (holiday pay, pension, etc.)
• This typically costs you more because you pay employer National Insurance contributions

Outside IR35 means the contractor is genuinely self-employed.

• They handle their own tax through their limited company
• You simply pay their invoice
• This is usually simpler and cheaper for your business

Who Is Responsible for Determining IR35 Status?

Since April 2021, medium and large private sector organisations have been responsible for determining the IR35 status of their contractors. This responsibility sits with the end client – that's you.

Small businesses are currently exempt from these rules, meaning contractors remain responsible for their own status determination. However, this exemption depends on company size thresholds, which have recently changed from April 2025.

Find out what your organisation falls under here.

How Do You Determine IR35 Status?

Use HMRC's tool. HMRC provides a Check Employment Status for Tax (CEST) tool that asks you questions about the working arrangement and gives you a determination.

Work with recruitment experts. Specialist agencies like Owen Daniels offer more than just placement support. As part of our service, we provide more in-depth IR35 assessments and guidance throughout the process to help ensure your determinations are correct from the start. Our assessments are backed by insurance and legal support in the event of an HMRC challenge, offering added reassurance and protection when operating outside IR35.

Whatever method you use, you'll need to provide the contractor with a Status Determination Statement (SDS) before they start work. This is a document that explains your IR35 decision.

Getting IR35 right is about balancing the benefits of hiring contractors with the risks of getting it wrong.

Benefits and Consequences

Benefits 

Hiring outside IR35 contractors offers: 

• Lower costs – no employer National Insurance or benefits to pay
• Flexible expertise – bring in specialists for specific projects
• Simple administration – just pay invoices, no complex payroll
• Access to top talent – many skilled contractors prefer outside IR35 roles

Consequences 

Getting IR35 wrong can mean:

• HMRC tax bills – you could be liable for unpaid tax going back years
• Financial penalties – HMRC can charge interest and penalties on top of back taxes
• Reputational damage – compliance issues can affect your business standing
• Contractor pushback – many contractors will refuse inside IR35 roles or charge significantly higher rates (often 20-30% more)

How Owen Daniels Can Help

We support businesses across engineering, manufacturing, and technical sectors with comprehensive IR35 compliance solutions, including:

• Expert IR35 assessments – We help you determine the status of roles accurately and defensibly
• Status Determination Statement management – We guide you through creating clear, compliant SDS documentation
• Working practice reviews – Our team can audit your contractor engagements to ensure contracts match reality
• Supply chain transparency – We work with vetted, compliant umbrella providers and maintain clear audit trails
• Ongoing support – IR35 legislation continues to evolve, and we keep you informed of changes that might affect your workforce

Need help with IR35 compliance? We are ready to support you with expert advice, compliant contractor solutions, and peace of mind. Get in touch today to discuss your contractor engagement needs.