When managing a contingent workforce, organisations frequently navigate the financial and operational complexities of tax determinations. Deciding whether an engagement falls within or outside IR35 affects your ability to attract top-tier talent and manage project budgets effectively. For the Board, Finance, and HR directors, understanding the commercial realities of these classifications is essential for maintaining compliance while protecting the bottom line.
Is it better to be inside or outside IR35?
For hiring businesses, an outside IR35 determination is commercially better because it avoids employer tax liabilities and attracts highly skilled contractors. However, an Inside IR35 status is necessary if the engagement is deemed employment, ensuring full legal and tax compliance.
Misclassifying an engagement as outside IR35 exposes your organisation to back-taxes and interest from HMRC. Penalties are easily avoided by ensuring you meet reasonable care. However, forcing contractors inside IR35 unnecessarily can lead to restricted access to talent, as skilled professionals seek projects elsewhere. Further, many businesses have historically insisted on using umbrella companies when contractors are not outside IR35, which carries more risk than IR35 due to the new umbrella tax legislation enacted in April 2026.
What are the financial differences between inside and outside IR35 for hirers?
Engaging a contractor outside IR35 incurs no employment tax obligations for the hirer, whereas an inside IR35 determination requires the deemed employer to deduct PAYE tax and National Insurance, alongside paying 15% Employer’s National Insurance. Bear in mind that with the new offsets legislation since April 2024, the IR35 tax risk can be less than 10% of contractors' fees. Blanket on-payroll-only policies now mean an extra, higher cost than the risk of hiring outside IR35, together with a restricted talent pool.
Forcing engagements inside IR35 drives up costs across the hiring supply chain. Data from the market shows that contractors often demand a rate increase of 20% to 30% to compensate for their reduced net income, and even more if travel and accommodation are needed.
Can a business choose to only hire outside IR35?
Theoretically yes, but a business should still assess each engagement individually based on employment status case law. A business can choose to structure its operations so that all contractors are hired on a “for services” basis and draft its contracts accordingly, thereby enabling safe outside IR35 hiring. But, to reiterate, they must carefully assess each role individually to demonstrate reasonable care.
The legislation means organisations should take reasonable care when making status determinations; otherwise they could be considered at high risk of misclassification, and potentially subject to penalties for not taking reasonable care. Choosing a status purely for commercial advantage or applying blanket determinations would likely be considered careless and lead to a protracted HMRC compliance check and potential significant tax liabilities. To protect your business from misclassification, every assessment must be robust, defensible, and reflective of the day-to-day working practices.
Take Control of Your Compliance and Partner with IR35 Shield
Ensure your status determinations are accurate, compliant, and fully defensible against HMRC scrutiny.
Partner with the industry experts at IR35 Shield; we’re here to support you and your business every step of the way. If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
