Inside vs Outside IR35 Explained

Ask contractors what “inside IR35” means and you’ll hear a lot of half-truths.

Some say it’s about tax. Others say it’s about umbrellas. A few insist it’s all down to what the contract says.

Here’s the thing: inside vs outside IR35 is really about risk and control, with tax being the outcome, not the starting point.

At its simplest, IR35 asks one uncomfortable question:

If you removed the limited company from this arrangement, would this person look like an employee?

If the answer leans towards yes, the engagement is likely inside IR35. If the answer is no because the contractor is clearly operating a business, it may fall outside IR35.

Everything else flows from that assessment: tax treatment, insurance needs, contract structure, and even how clients behave.

This article builds on the foundations in What Is IR35? and goes deeper into how the inside/outside distinction actually plays out in real UK contracting.

Outside IR35: What It’s Meant to Represent

Outside IR35 status exists for a reason. Despite popular belief, it’s not a loophole or a grey-area trick. It’s recognition that some people genuinely operate as independent businesses, even when they work for a single client at a time.

In a typical outside-IR35 engagement:

The contractor controls how the work is delivered
The client buys outcomes, not presence
There is genuine financial risk
The contractor can send a substitute (and it’s credible)

Crucially, no single factor guarantees outside IR35. HMRC, specifically HMRC, looks at the overall picture, not a checklist.

A practical test many experienced contractors use is this:

If this client disappeared tomorrow, would my business still exist?

If the honest answer is yes because you have processes, insurances, other prospects, and commercial exposure you’re thinking in the right direction.

Inside IR35: Employment for Tax, Not for Rights

Inside IR35 doesn’t mean you’ve failed as a contractor. It means the engagement has been assessed as employment-like for tax purposes.

And this is where frustration sets in.

Inside IR35 usually means:

Income tax and National Insurance deducted at source
No dividend planning
No ability to offset many business expenses

But what it doesn’t come with is equally important:

No holiday pay
No sick pay
No redundancy rights

You’re treated like an employee only when it suits the tax system.

This imbalance is why many contractors feel inside IR35 is less about fairness and more about risk transfer. Clients reduce exposure; contractors absorb the cost.

The Financial Difference Is Bigger Than “More Tax”

Most explanations stop at “you pay more tax inside IR35”. That’s technically correct and practically misleading.

The real financial impact shows up over time:

Employer’s National Insurance is often passed down the chain
Pension contributions may be minimal or non-existent
Rate pressure increases as clients attempt to offset costs
Cash-flow predictability changes under umbrella payroll

Many contractors only notice these effects months in, when renewals, extensions, or rate negotiations come around.

This is why inside IR35 often leads to behavioural change, not just tax adjustment. Contractors shorten engagements, demand higher rates, or leave sectors entirely.

Why Blanket “Inside IR35” Decisions Still Happen

Officially, blanket determinations are discouraged. In reality, they’re common.

The reason is simple and commercial, not legal.

For end clients:

A wrong outside decision creates liability
A blanket inside decision removes it

From their perspective, it’s asymmetric risk. From the contractor’s perspective, it’s a blunt instrument.

Understanding this dynamic helps contractors respond strategically negotiating scope, rate, or working practices, rather than assuming the decision is personal or purely technical.

Contracts vs Working Practices: Where Status Is Really Won or Lost

A well-drafted contract is necessary. It is not sufficient.

HMRC places heavy emphasis on what actually happens day to day, including:

Who directs the work
How change requests are handled
Whether contractors are treated differently from staff
Who bears the cost of mistakes

If a contract says you have autonomy, but your working reality mirrors permanent staff, that inconsistency becomes a risk.

This is why IR35 disputes so often hinge on evidence rather than paperwork and why working practices deserve as much attention as clauses.

Common Reasons Contractors Misjudge Their Own Status

Even experienced contractors get this wrong. Common assumptions include:

“I’m senior, so I must be outside IR35”
“They need my specialist skills that proves independence”
“I’ve been here for years, so I’m obviously embedded”

None of these are decisive.

HMRC isn’t interested in how valuable you are. It’s interested in how the relationship functions. Plenty of highly skilled specialists still operate in employee-like structures.