# AI tells a UK contractor that using a limited company (PSC) automatically avoids IR35 tax rules

- **ID:** `legal/uk-employment-status-ir35`
- **Domain:** legal
- **Category:** tax_error
- **Error Code:** `HMRC_IR35_MISCLASS`
- **Verification:** ai_generated
- **Fix Rate:** 82%

## Root Cause

IR35 (Intermediaries Legislation) applies when a contractor would be an employee if directly hired; using a Personal Service Company (PSC) does not exempt the contractor from deemed employment tax and NI; HMRC determines status based on working practices, not corporate structure.

## Version Compatibility

| Version | Status | Introduced | Deprecated |
|---------|--------|------------|------------|
| hmrc_guidance | active | — | — |
| off_payroll_rules | active | — | — |

## Workarounds

1. **Conduct an IR35 status determination using HMRC's Check Employment Status for Tax (CEST) tool: https://www.gov.uk/guidance/check-employment-status-for-tax. If inside IR35, operate payroll via the agency or umbrella company.** (85% success)
   ```
   Conduct an IR35 status determination using HMRC's Check Employment Status for Tax (CEST) tool: https://www.gov.uk/guidance/check-employment-status-for-tax. If inside IR35, operate payroll via the agency or umbrella company.
   ```
2. **Restructure the contract to include genuine substitution clause, no mutuality of obligation, and no control over how/when work is done. Example: 'The Contractor may provide a substitute at their own expense, subject to reasonable client approval.'** (75% success)
   ```
   Restructure the contract to include genuine substitution clause, no mutuality of obligation, and no control over how/when work is done. Example: 'The Contractor may provide a substitute at their own expense, subject to reasonable client approval.'
   ```

## Dead Ends

- **Using a generic contract template from an online source without an IR35-specific review** — HMRC looks at actual working conditions (control, substitution, mutuality of obligation), not just contract wording; a standard template often fails the status determination test. (80% fail)
- **Setting up a limited company but still working exclusively for one client with office hours and line management** — This creates an employment-like relationship; HMRC will deem the contract inside IR35 regardless of corporate structure. (90% fail)