Rising employment costs. Shifting workforce models. A renewed spotlight on compliance.

If you’re running an SME in the UK right now, chances are you’re feeling the pinch. With employment becoming increasingly expensive—from salary expectations to benefits and beyond—it’s no surprise more businesses are exploring contracted services as a leaner, smarter alternative. But before you swap a permanent hire for a contractor, there’s one thing you must understand: IR35.

Let’s open this can of worms - again.

What Is IR35 (And Why Should You Care Now)?

IR35 is HMRC’s way of identifying “disguised employment”—where a contractor, hired through a limited company (often a Personal Service Company or PSC), is essentially acting like an employee.

If someone falls inside IR35, they’re taxed like an employee—meaning PAYE and National Insurance apply, and the hiring business might be liable. Misclassification isn’t just risky; it can get expensive.

Right now, with contractors becoming the go-to for cost-conscious SMEs, understanding IR35 is a strategic must.

Why It’s Back in Focus in 2025

This isn’t a new issue, but context matters. Employment is getting costlier. Talent is more fluid. And SMEs are looking for flexible, project-based support to stay agile and competitive.

That’s where contractors come in.

But relying on contracted workers without understanding IR35 could expose your business to financial risk, penalties, or reputational damage. If you’re shifting more of your team into contractor-style arrangements, now’s the time to revisit how you assess their tax status.

How IR35 Status Is Assessed

The real working relationship matters more than the contract wording. HMRC and UK case law look at these three key factors:

1. Control – Who decides how, when, and where the work is done? If it's the client, that leans towards employment.
2. Personal Service – Can the contractor send someone else to do the work, or must they do it personally? A genuine substitution right points to self-employment.
3. Mutuality of Obligation – Is there an expectation that the client will keep offering work, and the contractor will keep accepting it? If so, it looks like a job, not a contract.

The IR35 Assessment Model (Weighted for Practical Use)

To bring structure to this grey area, here’s a model you can use to assess IR35 status more practically:

Here’s how it works:

How to use it:

Score each factor from 0 (clearly outside IR35) to 10 (clearly inside).
Multiply by the weight and total up to 100.
Then assess risk:
0–39: Low risk (likely outside IR35)
40–59: Grey area – proceed with caution and seek legal advice
60–100: High risk (likely inside IR35)

A Quick Example: The Onsite Developer

Let’s say a software developer is contracted for six months, on-site four days a week. They use your laptop, follow your project plan, and while substitution is in the contract, they’ve never used it. They’re also plugged into your systems and canteen.

Score:
Control – 9
Substitution – 6
MoO – 8
Financial Risk – 3
Equipment – 9
Integration – 7
Other – 5
Weighted Total: ~73/100 → High IR35 risk.

What About Overseas Clients?

If a UK-based contractor is working for a non-UK client with no UK office or agency involvement, IR35 may not apply. But that doesn’t mean the contractor is off the hook—they’ll still need to self-assess under the original rules. Our model still works as a strong first step in that process.

Why Use This Model?

Clarity – It makes a fuzzy area much clearer.
Defensibility – A structured approach shows you've taken reasonable care if HMRC comes knocking.
Efficiency – Helps SMEs avoid delays and confusion in contract negotiations.

Final Thoughts: IR35 Is Back (actually, it never left)—But You’re Ready

IR35 isn’t going anywhere. And in today’s climate, SMEs can’t afford to sleepwalk into non-compliance. Whether you’re hiring your tenth freelancer this quarter or reviewing long-standing contractor relationships, now is the time to tighten up your approach.

Getting IR35 right isn’t just about risk mitigation. It’s about building resilient, flexible, and future-proof workforce strategies.

If you want help applying the model, exploring digital tools to automate assessments, or building this into your contractor onboarding—let’s have a chat.

IR35: Back on the Radar for Cost-Savvy Business Owners in 2025