IR35 rules exist to differentiate genuine contractors from disguised employees. These are individuals who work like permanent staff but bill through a limited company to reduce tax. Misunderstanding these rules can lead to unexpected tax bills, penalties, or even HMRC investigations.
For contractors, staying outside IR35 is essential for maintaining independence, financial stability, and career flexibility.
This article outlines seven practical strategies to help you align your work practices with IR35 requirements, minimize risk, and retain control over your contractor status.
1. Know How Employment Status Is Assessed
HMRC evaluates your employment status using three key tests: control, substitution, and mutuality of obligation (MOO). Control refers to whether the client dictates how, when, and where you work. Substitution means you can send someone else to do the job without client approval.
MOO examines whether the client is obligated to offer work and if you’re obligated to accept it. Understanding the differences between inside vs outside IR35 is crucial. if your arrangement leans too heavily toward employee-like conditions in these areas, you’re likely inside IR35.
To stay outside IR35, structure projects to reflect genuine contractor independence. For example, negotiate deadlines rather than fixed hours. Clarify in contracts that you can provide a substitute (even if you never use it) and avoid ongoing “rollover” contracts that imply permanent employment. Regularly review working practices to ensure they align with these principles.
2. Draft Clear, IR35-Friendly Contracts
A well-written contract is your first line of defense. It should explicitly state that you’re a contractor, not an employee, and outline terms that reflect self-employment.
Key clauses include the right to substitution, project-based deliverables (not hourly work), and no entitlement to employee benefits like sick pay or pensions. Avoid language that implies hierarchy, such as reporting to a manager or adhering to company policies.
However, a contract alone isn’t enough. HMRC will scrutinize the actual working relationship. If your day-to-day tasks contradict the contract’s terms, like being micromanaged or required to attend staff meetings, the contract’s wording becomes irrelevant. Align your actions with the agreement, and keep records of communications that reinforce your contractor status.
3. Avoid Long-Term Exclusivity
Working exclusively for one client for years can signal employment under IR35. While long projects aren’t inherently problematic, dependency on a single client weakens your case.
Aim to work with multiple clients simultaneously or take breaks between contracts with the same company. This demonstrates you’re running a business, not filling a permanent role.
If exclusivity is unavoidable, mitigate risks. Use clear project-based scopes with defined end dates, and avoid open-ended agreements.
Document any gaps between engagements to show there’s no ongoing obligation. For example, if you return to a client after six months, highlight how the new project differs in scope or deliverables from the previous one.
4. Charge Project Fees, Not Hourly Rates
Billing by the hour can make you look like an employee, especially if you’re tied to a client’s schedule. Instead, structure payments around project milestones or deliverables. This shifts the financial risk to you (a key indicator of self-employment) and emphasizes results over time spent.
For instance, agree to a fixed fee for completing a software module rather than charging for 40 hours per week.
If hourly billing is non-negotiable, clarify in writing that the rate reflects expertise, not attendance. Include terms like “consultancy fees” or “service charges” to reinforce your business-to-business relationship. Avoid timesheets unless absolutely necessary, as they mimic employee tracking systems.
5. Maintain Financial Independence
Employees have taxes and National Insurance contributions deducted automatically. However, contractors handle their own. Use a separate business bank account, invoice clients under your company name, and avoid perks like company credit cards or expense reimbursements reserved for staff.
Cover your own costs for training, equipment, and insurance. This shows you’re investing in your business.
Additionally, diversify your income streams. Offer consultancy services, sell digital products, or take on short-term gigs outside your primary client. This proves you’re actively running a business rather than relying on a single employer-like relationship.
6. Limit Integration Into the Client’s Team
While collaboration is normal, over-integration can blur the line between contractor and employee. Avoid using a client’s email address, attending internal team-building events, or participating in performance reviews. Politely decline access to employee-only benefits, like gym memberships or bonuses, even if offered.
If you need access to client systems (e.g., Slack or project tools), use a generic vendor account instead of one tied to an employee ID. Communicate through professional channels like email or your business phone number, not internal staff platforms. This reinforces your external status.
7. Seek a Contract Review Before Signing
IR35 specialists or employment lawyers can spot red flags in contracts that you might miss. They’ll ensure terms around substitution, control, and MOO are airtight and reflect real-world practices. Many firms offer fixed-fee reviews, which are cost-effective compared to potential tax penalties.
After a review, negotiate problematic terms with the client. For instance, if a contract requires you to follow all company policies, ask to limit this to safety or compliance guidelines. Clients often agree to adjustments if it means avoiding their own IR35 liabilities, especially in the private sector where responsibility falls on them.
