IR35 is one of those topics where most UK startup founders have heard the term, know it matters, and are not completely sure what it requires them to do. This guide gives you the practical version — what it is, how it affects your hiring process, and what to do differently.
This is not legal advice. For your specific situation, particularly if you engage multiple contractors or have complex arrangements, consult an employment law solicitor or specialist IR35 accountant.
What IR35 actually is
IR35 (formally the off-payroll working rules) is HMRC's mechanism for taxing contractors who are, in substance, employees — even if they're technically engaged through a limited company or personal service company (PSC).
The rules exist because many workers who should be employees (and pay PAYE tax and National Insurance) were historically structured as limited company contractors, paying themselves dividends and paying significantly less tax.
The core question IR35 asks: If you removed the intermediary (the contractor's limited company), would this person be an employee?
If yes: the engagement is "inside IR35." The worker should pay tax at employment rates. If no: the engagement is "outside IR35." The contractor retains their tax efficiency.
How the rules changed in 2021
Before April 2021, contractors were responsible for determining their own IR35 status. After April 2021, the responsibility for IR35 determination shifted to the end client (the business engaging the contractor) for medium and large companies.
Small company exemption: If your company meets two of the following three criteria, you're a "small company" and the old rules apply — the contractor determines their own status:
- Annual turnover below £10.2 million
- Balance sheet below £5.1 million
- Fewer than 50 employees
Most seed and Series A startups in the UK meet this test and are exempt from the off-payroll working rules. The contractor is still responsible for assessing their own IR35 status.
Once you scale past the small company threshold, the responsibility shifts to you. At that point, you must issue a Status Determination Statement (SDS) for every contractor engagement.
The factors that determine IR35 status
Whether a contractor is inside or outside IR35 depends on the specifics of the engagement. HMRC uses several key tests:
Substitution. Can the contractor send someone else to do the work? A genuine contractor can substitute another suitable person. An employee cannot. If your contract says "you personally must do this work," that pulls toward inside IR35.
Control. Does the business control how, when, and where the contractor works? High levels of control — set hours, specific location, direction on how tasks are done — indicate employment. A contractor who controls their own working methods indicates genuine self-employment.
Mutuality of obligation. Is there an ongoing expectation of work, and an expectation that it will be offered? Employees have this. Genuinely independent contractors do not — each project is a separate commercial decision. If you offer rolling work indefinitely and the contractor always accepts, this pulls toward inside IR35.
Integration. Is the contractor embedded in the business — appearing on the org chart, listed in company directories, invited to all-hands meetings as staff, given a company email address? Visible integration indicates employment.
Financial risk. Does the contractor have genuine business risk — quoting for projects, absorbing cost overruns, correcting defective work at their own expense? Genuine contractors take financial risk. Employees do not.
No single factor is determinative. HMRC looks at the overall picture of the engagement.
What changes in your hiring process
Writing the job description
The language of your contractor job description matters — it signals intent and shapes the engagement that follows.
Avoid employee language:
- "You will report to [manager name]" → "Deliverables are agreed with [role]"
- "Working hours: 9–6, Monday–Friday" → "Engagement based on project deliverables, with availability agreed by mutual arrangement"
- "You will be part of the [team name] team" → "You will work alongside the [team name] team on [specific project]"
- "Benefits include..." (contractor descriptions shouldn't list employee benefits)
Be clear about scope: A contractor engagement should have defined scope and end conditions. A job description that reads like a permanent role with no defined end point — "ongoing responsibilities include..." — looks like employment.
Include substitution rights: "The contractor may provide a suitably qualified substitute subject to our approval" — this clause, if genuine, supports outside IR35.
Name the deliverable, not the activity:
- Employee language: "You will attend stand-ups and write code for our product"
- Contractor language: "Delivery: a refactored authentication service with documented API contracts, tested and integrated by [date]"
The engagement contract
Your written contract must reflect the genuine nature of the engagement — it needs to actually match how the work is done, not just include the right clauses as window-dressing. HMRC can look past contract language if the working practices are inconsistent with it.
If you're using a template contractor agreement from the internet, have it reviewed by an employment law solicitor before you engage contractors at meaningful scale. A poorly drafted contract is a liability.
The Status Determination Statement (SDS)
If you're a medium or large company (outside the small company exemption), you must provide a written SDS to every contractor before or at the start of the engagement. The SDS states whether the engagement is inside or outside IR35, with reasons.
HMRC provides a Check Employment Status for Tax (CEST) tool — it's not perfect, but it's a useful starting point and HMRC will stand by its result if the information you enter is accurate.
Practical checklist for a UK startup engaging contractors
- Confirm whether you're inside or outside the small company exemption
- Use contractor-specific job description language (deliverables, not duties)
- Include genuine substitution rights in the contract
- Avoid integrating contractors as embedded team members
- Agree deliverables and timelines, not working hours and locations
- Issue an SDS if you're a medium/large company
- Review the engagement if it extends significantly beyond its original scope
Screening contractor candidates
Evaluating contractor CVs is a different process from permanent hire evaluation. Contractors typically have:
- Project-based CVs listing clients and deliverables rather than progressive job titles
- Shorter tenures (6–18 months per engagement is normal, not a red flag)
- Broader skill breadth (contractors often cover more of the stack than a specialist permanent hire)
- Variable CV formats (some are highly polished; others are very sparse)
AI screening tools that use keyword matching perform poorly on contractor CVs because the vocabulary is project-specific and non-standard. Semantic matching — which understands what a contractor actually built and delivered — handles this better.
When you run an AI match in Rekvo against a contractor JD, the AI reads each CV for what the person has actually accomplished, not just whether their CV contains the right keywords. A contractor who describes "delivered a full rewrite of the payment service at a fintech startup" matches a "payments infrastructure" requirement even without exact keyword overlap.
For a job description template tailored to senior engineering contractors, adapt the Senior Backend Engineer Job Description Template with the contractor language adjustments described above.
Frequently asked questions
If I engage a contractor inside IR35, what does that mean practically? If the engagement is inside IR35, you (the fee-payer — typically the company directly engaging the contractor) must deduct income tax and employee NICs from the contractor's fee and pay employer NICs on top. This significantly increases the cost of the engagement and reduces the contractor's take-home. Many contractors will not accept inside IR35 engagements, so getting the determination right matters.
Can a contractor challenge my IR35 determination? Yes. If you issue an SDS as a medium/large company, the contractor (or their agency, if applicable) can dispute the determination. You must respond within 45 days with a revised SDS or written reasons for maintaining your position. After 45 days, if you haven't responded, the liability transfers to the fee-payer — usually you.
Does IR35 apply to overseas contractors? Generally, IR35 applies to UK tax residents and to work performed in the UK. Overseas contractors working entirely outside the UK for a UK company are typically outside IR35, though the specifics depend on their residence status and the nature of the work. This is an area where specialist advice is worth the cost.
We're a small startup — do we need to worry about this now? If you meet the small company exemption (under 50 employees, turnover under £10.2m, balance sheet under £5.1m) — which most seed and Series A startups do — you're not subject to the off-payroll working rules. The contractor determines their own status. You should still use appropriate contractor language in your JDs and contracts, and you should review your status annually as you grow.
Where can I get a formal IR35 assessment? HMRC's CEST tool is the free starting point. For engagements with significant financial stakes, use an IR35 specialist — firms like Bauer & Cottrell or Qdos Contractor provide assessments for individual engagements. Budget £300–£500 for a professional assessment.