IR35 and Limited Companies

Why IR35 Is Primarily About Limited Companies

IR35 was designed with one specific structure in mind: the personal service company (PSC).

A PSC is typically:

• A limited company

• Owned and controlled by the contractor

• Used to supply the contractor’s services to clients

IR35 exists to test whether that company is genuinely operating as a business, or merely acting as a vehicle for employment income.

Understanding how IR35 interacts with limited companies is essential, because this is where most misunderstanding.

Limited Companies Outside IR35: The Traditional Model

When a contract sits outside IR35, the limited company operates in the way contractors expect:

• The company invoices the client or agency

• The director controls how income is extracted

• Dividends can be paid alongside salary

• Business expenses can be offset

• The company bears commercial risk

This model rewards independence and entrepreneurship, but only where it genuinely exists.

Outside IR35, the limited company is recognised as a business, not ignored.

What Changes When a Limited Company Is Inside IR35

Inside IR35 doesn’t ban limited companies. It changes how income is treated.

When a contract is inside IR35:

• Income is treated as employment income

• PAYE is applied to that income

• Dividend planning is effectively removed

• Many expenses can’t be offset

The company still exists, but its tax advantages disappear for that engagement.

This is why many contractors question whether maintaining a limited company is worthwhile for inside-IR35 work.

Why Some Contractors Keep Their Limited Company Anyway

Despite the tax changes, many contractors keep their limited companies even when working inside IR35.

Common reasons include:

• Other outside-IR35 clients

• Future contract plans

• Retaining business identity

• Simplicity of switching back

For contractors with mixed engagements, limited companies remain relevant, even if not always efficient.

Dividends, Salary, and the Loss of Flexibility

One of the biggest psychological shifts inside IR35 is the loss of choice.

Outside IR35:

• Contractors choose how and when to extract income

• Tax planning is flexible and lawful

Inside IR35:

• Income is taxed as salary

• Timing and structure are largely fixed

This isn’t about avoidance. It’s about recognising that independence brings flexibility and IR35 removes it where independence is not accepted.

Expenses and Limited Companies Under IR35

Expenses are another area of confusion.

Outside IR35:

• Legitimate business expenses can usually be offset

Inside IR35:

• Many expenses become non-deductible

• Travel and subsistence is often restricted

• Only limited costs remain allowable

This can materially change the economics of an engagement, especially for contractors who travel frequently.

Limited Companies, Risk, and HMRC Scrutiny

Limited companies sit at the centre of HMRC’s IR35 focus.

HMRC examines:

• How companies are structured

• How income is extracted

• Whether contracts align with working practices

A well-run limited company doesn’t guarantee outside IR35 status, but poor administration can weaken even strong cases.

Mixing Inside and Outside IR35 Contracts

Many contractors now operate mixed portfolios:

• One client inside IR35

• Another outside IR35

This is legally allowed, but it requires care.

Each engagement is assessed separately. Mixing statuses doesn’t “average out” risk. Record-keeping, evidence, and clarity matter more in these situations.

Why Limited Companies Still Matter Post-Reform

Some predicted IR35 would kill limited company contracting. That hasn’t happened.

Limited companies still matter because:

• Not all roles are inside IR35

• Many clients still engage outside IR35

• Business-to-business contracting still exists

IR35 narrowed the field. It didn’t close it.

Common Mistakes Limited Company Contractors Make

Recurring issues include:

• Assuming company structure determines status

• Relying on historical assessments

• Ignoring working practice drift

• Treating all income the same

Limited companies remain powerful tools, but only when used with awareness of IR35 boundaries.

A Practical Way to Think About Limited Companies and IR35

Instead of asking “Should I close my company?”, ask:

Do I still operate as a business across my engagements?

If the answer is yes, the limited company likely still has a role. If not, it may be time to reassess.