What is IR35 and does it apply to you?

Whether you’re a contractor, a self-employed driver, or a business that relies on flexible labour, you’ve probably heard of IR35.

In logistics especially, IR35 plays a big role in how people are taxed and how businesses stay compliant. Getting it wrong can lead to financial penalties and unwanted attention from HMRC. Getting it right gives you confidence in your compliance and a workforce structure you can rely on.

What is IR35?

IR35, also known as the off-payroll working rules, is UK tax legislation introduced in 2000. Its aim is to stop people from avoiding tax by working like an employee while being paid like a business.

The legislation looks at whether someone working through a limited company is genuinely self-employed, or whether their working arrangement is closer to employment. If it looks like employment, HMRC expects them to be taxed like an employee.

It’s important to note that IR35 doesn’t ban self-employment, and it doesn’t stop subcontractors from operating through limited companies. Instead, it sets clear boundaries to make sure people are taxed fairly, based on how they actually work rather than what’s written on paper.

Why does IR35 exist?

Before IR35 was introduced, it was common for workers to leave permanent roles, set up limited companies, and return to the same business doing the same job. The only real difference was how they were paid and taxed.

This is known as disguised employment. It happens when someone is classed as self-employed for tax purposes but works in the same way as an employee.

Disguised employment allows individuals to pay less Income Tax and National Insurance than employees doing the same work. IR35 was introduced to close this gap and make sure people are classified correctly based on their working relationship and responsibilities.

Who does IR35 apply to?

IR35 primarily applies to contractors who provide their services through an intermediary, usually a limited company.

But it also applies to the businesses that engage those contractors, depending on their size.

Medium and large businesses

If you’re a medium or large business, you are responsible for deciding whether IR35 applies to each contractor you engage.

As of April 2025, a business is classed as medium if it meets two or more of the following criteria:

• Annual turnover of no more than £54 million
• Balance sheet total of no more than £27 million
• Monthly average number of employees no more than 250

Whereas a large business will exceed two or more of those criteria.

Most logistics businesses will typically fall within these categories. If your business falls into this classification, when engaging with contractors, you must:

• Assess their status
• Issue a Status Determination Statement (SDS)
• Apply the correct taxes

And in the event you get these steps wrong, you may be found liable by HMRC.

Micro-entities and small businesses

Small businesses are exempt from the off-payroll reforms. In these cases, responsibility for IR35 remains with the contractor rather than the business engaging them.

What does inside IR35 mean?

Being inside IR35 means the worker is treated as an employee for tax purposes. Even if they operate through a limited company, HMRC believes their working arrangement is closer to employment than self-employment.

What happens when someone is inside IR35?

• They are no longer taxed as a limited company
• Income Tax and National Insurance are deducted at source
• They are paid via PAYE

Being taxed inside IR35 does not automatically give someone employment rights like holiday pay or sick pay. IR35 affects tax treatment only.

What does outside IR35 mean?

If a worker is outside IR35, they are genuinely self-employed for tax purposes. They can continue operating through their limited company and manage their own tax affairs.

What happens when someone is outside IR35?

• They have control over how their work is done
• They can send a substitute to carry out the work
• There is no obligation to offer or accept ongoing work
• They take on financial risk and run their own business

How is IR35 status determined?

When determining IR35 status, HMRC looks closely at the actual working relationship between the contractor and the end client. There are three key factors that carry the most weight in this decision.

Supervision, direction and control

This assesses how much control the business has over how the work is carried out. If the business dictates how, when, and where the work must be done, the relationship looks more like employment.

Right to substitution

This looks at whether the contractor can send someone else to do the work. If the contractor must personally carry out the work, this points towards employment rather than self-employment.

Mutuality of obligation

This considers whether the business is obliged to offer work and whether the contractor is obliged to accept it. Ongoing obligations on both sides suggest an employment-like relationship.

What are the consequences of getting IR35 wrong?

Getting IR35 wrong can be costly.

HMRC penalties are based on behaviour and intent, and may include:

• Having to pay back 30% of unpaid tax if HMRC deems you were careless with status and didn’t know it was wrong
• Having to pay back 70% of unpaid tax if you knew the status was wrong, but did nothing about it
• Having to pay back 100% of unpaid tax if HMRC believes the status was wrong and deliberately concealed

In many cases, these penalties fall on the end client.

How Wise helps you manage IR35

Wise helps logistics businesses make IR35 clear, and manageable. Our compliance teams support you in understanding when IR35 applies and reducing risk through structured, reliable processes.

With Wise, you benefit from:

• Expert guidance from our in-house compliance team
• Ongoing support as legislation and guidances change
• A secure hub for storing and managing important compliance documents
• A legal contribution fund of £100k that covers legal costs for our clients for anything up to a Tier 1 tribunal

When IR35 is built into your processes, it becomes far easier to manage. And that’s exactly what Wise is here to help you do.