IR35 and Contractor Invoicing Through a Limited Company

What are the IR35 off-payroll working rules?

IR35 is the shorthand name for the UK's off-payroll working legislation, originally introduced in 2000 and substantially reformed in 2017 and 2021. The rules are designed to ensure that workers who provide services through an intermediary (typically their own limited company, known as a personal service company or PSC) pay broadly the same tax as employees who work in similar circumstances.

HMRC's concern is with arrangements where a worker would, in substance, be an employee of the client if there were no intermediary company in between. The test is whether the hypothetical contract between the worker and the client would be one of employment. Three key factors courts and HMRC examine are: control (does the client control how, when, and where the work is done?), mutuality of obligation (does the client have to offer work and the worker have to accept it?), and substitution (can the worker send a substitute to do the work?). Genuine businesses typically have control over their own working methods, face financial risk, supply their own equipment, and work for multiple clients.

Who determines IR35 status?

The responsibility for determining IR35 status changed significantly in April 2021 for the private sector. For engagements with medium and large private sector clients, and all public sector clients, it is the client (the end engager) who must assess whether the rules apply and issue a Status Determination Statement (SDS) to the contractor and any agency in the chain. The fee payer (usually the agency if one is involved) is then responsible for deducting PAYE tax and National Insurance from the payment before it reaches the PSC.

For small private sector clients (those that meet two of three criteria: annual turnover under £10.2 million, balance sheet total under £5.1 million, fewer than 50 employees), the old rules still apply. The PSC itself is responsible for self-assessing its own IR35 status and paying the appropriate tax if the rules apply.

How IR35 affects your invoicing

The invoicing process itself does not change under IR35. Whether you are inside or outside IR35, your PSC raises an invoice to the client or the agency for the full gross amount of your services, including VAT if applicable. The format and required fields are the same as for any other limited company invoice: company name, registered address, company number, VAT number (if registered), invoice number, date, description of services, and amounts.

The difference is what happens to the money after the invoice is paid. If you are inside IR35 and working with a medium/large client, the fee payer will deduct income tax and employee National Insurance contributions at source before paying your PSC. Your PSC will then receive the net amount. If you are outside IR35, your PSC receives the full invoiced amount and you choose how to extract income through salary and dividends in the normal way.

VAT and IR35

If your PSC is VAT-registered, you must charge VAT on your invoices regardless of your IR35 status. The VAT is collected from the client and paid to HMRC; it is not affected by whether the income is inside or outside IR35 for income tax and NIC purposes. The two regimes operate independently.

If you are inside IR35 and the fee payer is deducting PAYE at source, they will also pay HMRC the employer National Insurance contributions on the deemed employment income. This is in addition to paying the VAT on your invoices, which they will reclaim as input tax if they are themselves VAT-registered.

Records to keep for IR35 compliance

Good record-keeping is essential for demonstrating that you are genuinely outside IR35, or for defending your position if HMRC investigates. You should keep:

• All contracts and statements of work for each engagement
• Status Determination Statements issued by clients
• Correspondence about your working arrangements and any changes to them
• Invoices issued to clients and agencies, showing the services provided
• Evidence of working for multiple clients simultaneously or consecutively
• Evidence that you supply your own equipment and take on financial risk
• Any contracts that include a right of substitution clause
• Records of any actual substitutions you have made

Tidybill keeps a permanent record of all invoices you issue, which forms part of the evidential trail demonstrating the commercial reality of your business activities.

Umbrella companies vs PSCs

Some contractors who are consistently inside IR35 choose to operate through an umbrella company rather than their own PSC. Under an umbrella arrangement, the contractor becomes an employee of the umbrella company, which invoices the client or agency and then pays the contractor as an employee through PAYE. This simplifies administration but removes the flexibility of running your own company.

The choice between a PSC and umbrella is a commercial and tax planning decision that depends on your specific circumstances, including the nature of your engagements, your IR35 exposure, and your preferences for administration. A qualified contractor accountant can advise on the most appropriate structure.

For more on the invoicing requirements that apply to your PSC, see the limited company invoicing guide and the VAT invoice requirements guide.