IR35 Explained for Startups Hiring Engineers

For many UK startups, hiring contractors is the fastest way to access specialist engineering expertise.

Whether you’re building your first MVP, integrating AI into an existing product, or scaling after a funding round, contractors allow you to bring in experienced professionals without making long-term hiring commitments. It’s one of the reasons why many early-stage companies rely on contract software engineers, DevOps specialists, QA engineers, and Fractional CTOs to accelerate delivery.

Yet one topic consistently creates uncertainty among founders: IR35.

Questions such as “Can my startup hire contractors?”, “Who decides whether someone is inside or outside IR35?” and “Does IR35 apply to small companies?” often arise before the first contract is even signed.

The reality is that IR35 isn’t designed to stop startups from hiring contractors. Instead, it’s a set of tax rules that determine how certain contractor relationships should be treated. For many early-stage businesses, understanding the basics of IR35 is enough to hire with confidence while knowing when professional advice is appropriate.

In this guide, we’ll explain what IR35 is, why it matters for startups hiring software engineers, and the practical considerations founders should keep in mind when building flexible technical teams.

Key Takeaways

• IR35 is UK tax legislation, not employment legislation. It determines how certain contractor engagements are taxed.
• Many early-stage startups qualify as small companies, meaning responsibility for determining IR35 status will often remain with the contractor.
• Hiring contractors is still a common and legitimate way for startups to access specialist engineering talent.
• IR35 assessments depend on the reality of the working relationship, not just what is written in the contract.
• Contractors remain particularly valuable for AI implementation, product development, infrastructure projects, and other specialist technical work.
• Where uncertainty exists, founders should seek professional legal or tax advice before making decisions.

What Is IR35?

IR35, officially known as the Off-Payroll Working Rules, is UK tax legislation introduced to determine whether an individual working through an intermediary – typically their own limited company – should be treated as an employee for tax purposes.

The legislation was originally introduced to address what HM Revenue & Customs (HMRC) refers to as “disguised employment.” This describes situations where someone works in much the same way as a permanent employee but invoices through a limited company, potentially benefiting from a different tax treatment.

It’s important to understand that IR35 does not prevent businesses from hiring contractors, nor does it determine employment rights. Instead, it focuses specifically on the tax treatment of a working relationship.

In practice, every contractor engagement falls into one of two categories:

• Outside IR35 – the contractor is considered genuinely self-employed for tax purposes.
• Inside IR35 – the contractor is considered to be working in a manner similar to an employee and is taxed accordingly.

Whether an engagement falls inside or outside IR35 depends on the overall nature of the working relationship rather than any single factor.

For startups, this distinction matters because contractor hiring remains one of the most flexible ways to access experienced engineering talent. Understanding the basics of IR35 allows founders to make informed hiring decisions without assuming that contractor engagements carry unnecessary risk.

Why Does IR35 Matter for UK Startups?

Most startups don’t begin by hiring large permanent engineering teams.

Instead, they bring in specialist expertise as it’s needed – whether that’s a Full-Stack Engineer to build an MVP, a DevOps Engineer to prepare infrastructure for launch, or a Fractional CTO to define technical strategy. Contract hiring gives founders the flexibility to move quickly while keeping fixed costs under control.

Because contractor engagements are so common in technology, understanding IR35 becomes part of building a compliant hiring process.

The good news is that many early-stage startups qualify as small companies, meaning the responsibility for determining IR35 status often remains with the contractor rather than the client. As companies grow, however, those responsibilities can change, making it important for founders to understand how the rules evolve alongside their business.

IR35 shouldn’t be viewed as a barrier to flexible hiring. Rather, it’s one of several legal and tax considerations that founders should understand as they build engineering teams.

Who Is Responsible for Determining IR35 Status?

One of the biggest misconceptions about IR35 is that every company hiring contractors has to determine whether an engagement falls inside or outside the legislation.

In reality, the responsibility depends on the size of the organisation engaging the contractor.

For many early-stage startups, this distinction works in their favour.

Small Companies

If your business qualifies as a small company under the Companies Act 2006, responsibility for determining IR35 status will generally remain with the contractor’s intermediary (usually their limited company).

A company is generally considered small if it meets at least two of the following criteria:

Annual turnover – £15 million or less.

Balance sheet total – £7.5 million or less.

Average number of employees – 50 or fewer.

Many pre-seed, seed and even Series A startups fall within these thresholds.

Although founders should still understand how IR35 works, the formal responsibility for assessing status often remains with the contractor.

Medium and Large Companies

Once a company grows beyond the small company thresholds, the responsibility typically shifts.

Medium and large businesses are generally required to determine whether a contractor falls inside or outside IR35 before the engagement begins. They must communicate that decision to the contractor and, where applicable, ensure the correct tax treatment is applied.

For startups, this becomes increasingly relevant as the business scales. A hiring process that worked during the company’s first few years may need to evolve as headcount and revenue increase.

Why This Matters

Understanding who is responsible helps founders make informed hiring decisions from the outset.

It also highlights an important point: IR35 doesn’t prevent startups from hiring contractors. Instead, it determines which party is responsible for assessing the engagement and ensuring the appropriate tax treatment.

As your company grows, it’s worth reviewing your hiring processes periodically to ensure they remain aligned with the latest regulatory requirements.

How Does IR35 Work? Understanding Inside vs Outside IR35

IR35 isn’t determined by a single clause in a contract or a specific job title.

Instead, HMRC looks at the overall working relationship between the contractor and the client. The question is whether, in practice, the contractor is operating as an independent business or working in a manner that closely resembles permanent employment.

Although every engagement is assessed on its own facts, several factors are consistently considered.

Control

One of the most significant considerations is control.

HMRC may look at questions such as:

• Who decides how the work is completed?
• Who controls working hours?
• Can the contractor determine their own approach to delivering the work?
• Is there flexibility in where the work is carried out?

Independent contractors will often have greater autonomy over how they deliver agreed outcomes than permanent employees.

Right of Substitution

Another important factor is whether the contractor has a genuine right of substitution.

This means they may be able to provide another suitably qualified individual to perform the work, subject to the terms of the agreement.

While substitution isn’t relevant in every engagement, a genuine contractual right can indicate that the contractor is operating as an independent business rather than as an employee.

Mutuality of Obligation

HMRC also considers what is known as mutuality of obligation.

In simple terms, this looks at two questions:

• Is the company obliged to continue offering work?
• Is the contractor obliged to continue accepting it?

Contractor engagements are often project-based, with clearly defined deliverables and end dates. This differs from an ongoing employment relationship, where both parties generally expect work and remuneration to continue indefinitely.

The Reality Matters More Than the Contract

One of the most important principles of IR35 is that working practices should reflect the written agreement.

A well-drafted contract is valuable, but if the day-to-day relationship operates like permanent employment, HMRC may place greater weight on the reality of the engagement than on the wording of the document.

For founders, this means compliance isn’t only about having the right paperwork. It’s also about ensuring the contractor relationship genuinely reflects the way the engagement is intended to operate.

How IR35 Affects Hiring Software Engineers

Software engineering has long been one of the industries where contract work is common. From startups building their first MVP to established businesses delivering large transformation projects, contractors allow companies to access specialist expertise without immediately expanding permanent headcount.

As a result, founders hiring technical talent are more likely to encounter IR35 than founders hiring in many other industries.

The good news is that IR35 shouldn’t discourage startups from working with contractors. Instead, it should encourage founders to understand how contractor engagements are structured and when professional advice may be appropriate.

For many technology companies, contractors are brought in for projects such as:

• Building a Minimum Viable Product (MVP)
• Scaling an engineering team after investment
• Implementing AI capabilities with AI Engineer
• Cloud migrations and infrastructure improvements with Cloud Engineer
• Cybersecurity projects
• Technical due diligence
• Fractional engineering leadership like Fractional CTO

These engagements are often well suited to flexible hiring because they require highly specialised expertise for a defined period of time rather than permanent capacity.

As businesses grow, they often transition from relying primarily on contractors to building larger in-house engineering teams. For many startups, however, contractors provide the flexibility needed during the earliest stages of growth.

Contractors vs Permanent Employees: Which Model Is Right?

There isn’t a single hiring model that works for every startup.

The right approach depends on your stage, budget, hiring plans and the type of work you need to deliver.

Many successful startups combine permanent employees with specialist contractors, allowing them to balance long-term capability with short-term flexibility.

The comparison below summarises the differences.

Contractor – Ideal for specialist projects;
Permanent Employee – Ideal for long-term business growth;

Contractor – Flexible engagement periods;
Permanent Employee – Ongoing employment relationship;

Contractor – Fast access to specialist expertise;
Permanent Employee – Greater organisational continuity;

Contractor – Suitable for changing workloads;
Permanent Employee – Suitable for stable, predictable demand;

Contractor – Common for AI implementation, infrastructure and product launches;
Permanent Employee – Common for core engineering and business functions;

For example, a startup preparing to launch its first AI-powered product may hire a permanent Product Manager and Senior Software Engineer while bringing in a contract DevOps Engineer and Fractional CTO for a six-month implementation project.

This approach allows founders to build long-term capability without delaying product delivery.

Ultimately, contractor hiring shouldn’t be viewed as an alternative to permanent recruitment. Instead, it should be seen as another tool that helps startups access the right expertise at the right stage of growth.

How to Hire Contractors While Staying Compliant

Although every engagement is different, there are several practical steps founders can take to build contractor relationships with confidence.

Clearly Define the Scope

Before engaging a contractor, define the objectives of the project, expected deliverables and the intended duration of the engagement.

A clearly defined scope helps both parties understand expectations from the outset.

Use Appropriate Agreements

Written contracts should accurately reflect the intended contractor relationship.

The agreement should align with how both parties expect the engagement to operate in practice.

Review Working Arrangements

IR35 assessments are based on the reality of the relationship, not simply the wording of a contract.

Founders should periodically review whether day-to-day working practices continue to reflect the original agreement.

Understand When Professional Advice Is Needed

As businesses scale, contractor engagements often become more frequent and more complex.

Seeking advice from qualified legal or tax professionals can help founders understand their obligations and reduce uncertainty before entering into new engagements.

Common IR35 Mistakes Startups Should Avoid

Many IR35 issues don’t arise because founders intentionally ignore the rules.

Instead, they often result from misunderstandings about how contractor relationships should operate.

Some of the most common mistakes include:

Assuming IR35 Prevents Contractor Hiring

One of the biggest misconceptions is that IR35 makes contractor hiring too risky.

In reality, contractors remain an essential part of the UK technology ecosystem.

Treating Contractors Like Employees

A contractor engagement should reflect an independent business relationship.

Working practices that closely resemble permanent employment may create unnecessary uncertainty.

Relying Solely on the Contract

A well-written agreement is important, but it isn’t enough on its own.

The day-to-day working relationship should remain consistent with the contractual arrangements.

Leaving Compliance Until Later

Many startups only begin considering IR35 after growing significantly.

Understanding the rules early allows founders to build scalable hiring processes that evolve alongside the business.

Next Steps for Founders

Hiring specialist engineers doesn’t need to be complicated.

For many startups, contractors provide the flexibility to build products, launch new features and access expertise that would otherwise be difficult to hire permanently.

Understanding the basics of IR35 helps founders make informed hiring decisions while recognising when professional advice is appropriate.

As your company grows, your hiring strategy will naturally evolve. Some roles will become permanent, while others will continue to benefit from specialist contract expertise.

The most effective engineering teams are rarely built around a single hiring model. Instead, they combine permanent employees, contractors and fractional specialists in a way that supports the company’s stage of growth and long-term objectives.

FAQ

Does IR35 apply to every startup?

No. IR35 can apply to businesses of all sizes, but who is responsible for determining IR35 status depends on the size of the company engaging the contractor. Many early-stage startups qualify as small companies, meaning the responsibility generally remains with the contractor. As businesses grow, those responsibilities may change.

Can startups still hire software engineering contractors?

Yes. IR35 does not prevent startups from hiring contractors.

Many startups continue to use contract software engineers, DevOps engineers, QA specialists and Fractional CTOs because they provide access to specialist expertise without requiring long-term employment commitments. IR35 simply determines how certain contractor engagements are treated for tax purposes.

What is the difference between inside and outside IR35?

An engagement outside IR35 generally reflects a genuine independent contractor relationship for tax purposes.

An engagement inside IR35 is one where the contractor is considered to be working in a manner similar to an employee and is therefore taxed accordingly.

The outcome depends on the overall working relationship rather than a single contractual clause.

Can I hire overseas software engineers without worrying about IR35?

IR35 is UK tax legislation, but hiring internationally introduces other legal and tax considerations depending on the country where the contractor is based.

If you’re hiring engineers outside the UK, it’s important to understand the relevant local regulations and seek professional advice where appropriate.

Is it better to hire contractors or permanent employees?

Neither approach is universally better.

Permanent employees are often the right choice for building long-term internal capability, while contractors provide flexibility and access to specialist expertise for defined projects or periods of growth.

Many startups successfully combine both models as they scale.

Should founders seek legal or tax advice?

Yes.

IR35 assessments depend on the specific facts of each engagement. If you’re unsure how the legislation applies to your business, you should seek advice from a qualified legal or tax professional before making hiring decisions.

Final Thoughts

Contract hiring has become an essential part of the UK technology ecosystem, giving startups access to specialist expertise exactly when they need it.

While IR35 introduces important tax considerations, it shouldn’t be viewed as a barrier to hiring contractors. Understanding the basics of the legislation, knowing when it applies, and seeking professional advice where appropriate allows founders to make informed hiring decisions with confidence.

As your startup grows, your hiring strategy will naturally evolve. The most successful companies rarely rely on a single hiring model – they combine permanent employees, contractors and specialist consultants to build teams that can adapt as the business changes.

Whether you’re building your first MVP or expanding an established engineering team, finding the right technical talent quickly can be a significant competitive advantage.

At Yotewo, we help UK startups and scale-ups hire pre-vetted software engineers, DevOps engineers, QA specialists, product managers, designers and technology leaders through flexible hiring models tailored to different stages of growth.

If you’re looking to hire software engineers, AI specialists or fractional technical leaders, we’d be happy to help. Get in touch with our team via this link or sign up at app.yotewo.com.

Disclaimer

This article is intended for general informational purposes only and does not constitute legal, tax or employment advice. IR35 assessments depend on the specific circumstances of each engagement and may change over time. Before making decisions regarding contractor hiring or IR35 status, you should seek advice from a qualified legal or tax professional.