What Is IR35 in Aerospace Contracting? What It Really Means for Contractors
What Is IR35?
IR35 is UK tax legislation that governs how contractors are taxed when they provide services through their own limited company. Officially known as the Intermediaries Legislation, it exists to determine whether a contractor is genuinely operating as a business or should be treated as employed for tax purposes.
In practical terms, IR35 asks a single question: if the limited company did not exist, would the individual be working as an employee of the client? If the answer is yes, the role is classed as inside IR35 and income tax and national insurance contributions are applied broadly in line with employment. If the answer is no, the engagement can sit outside IR35 and the contractor can operate through their limited company in the usual way.
For aerospace contractors, IR35 is rarely an abstract tax issue. It directly affects take‑home pay, contract structure, rate negotiations, and whether working through a personal service company remains viable.
Why IR35 Exists and How It Changed
IR35 was introduced in 2000 following concerns from the Inland Revenue (now HMRC) that contractors operating through personal service companies were reducing income tax and national insurance by taking income as dividends rather than salary. The intent was to address tax avoidance by individuals working in roles that closely resembled permanent employment, often described as disguised employment.
For many years, responsibility for assessing IR35 status sat with the contractor’s limited company. That changed with reforms to the off payroll working rules. In 2017, public sector organisations became responsible for determining employment status. In 2021, those rules were extended to the private sector.
Today, most medium and large private sector businesses are responsible for issuing a status determination statement for each contractor engagement. Where the rules apply, the organisation engaging the contractor becomes the deemed employer for tax purposes. This includes the majority of UK aerospace and defence primes, major MRO providers, and large engineering consultancies.
Why IR35 Affects Aerospace Contractors So Strongly
Aerospace has always relied heavily on contractors. Programmes scale up and down, specialist expertise is required for defined phases, and many roles exist specifically because flexibility is needed.
Long project timelines, safety‑critical environments, and embedded engineering teams mean aerospace contractors often work alongside permanent staff for extended periods. From a tax perspective, this can make roles look employed, even when the commercial reality is project delivery rather than employment.
Defence and aerospace organisations are also risk‑averse. Since the private sector reform, many end clients have adopted conservative approaches to IR35 status to protect themselves from tax liability. In practice, this has led to a high proportion of inside IR35 determinations across engineering, systems, avionics and manufacturing roles.
Inside IR35 vs Outside IR35: What It Means Day to Day
When a role is classed as inside IR35, the contractor pays income tax and national insurance at source, usually via PAYE. The limited company still exists, but most of the financial benefits disappear. There are no employment rights such as sick pay or holiday pay, despite being taxed as employed for tax purposes.
Outside IR35 engagements allow contractors to operate their limited company as a genuine business. Income is paid to the company, corporation tax applies, and remuneration can be structured in line with tax legislation. For many aerospace contractors, this difference can mean a 20 to 30 percent swing in net income.
It is important to note that IR35 status applies to the engagement, not the individual. A contractor can be inside IR35 on one role and outside IR35 on another, depending on the working arrangements.
How IR35 Status Is Determined in Aerospace Roles
HMRC focuses on the reality of the working practices, not just the written contract. Status is assessed against a hypothetical contract that reflects the real relationship between the parties. Three core tests are used to determine employment status.
Control examines who decides how, when and where the work is done. Aerospace contractors working to defined deliverables with autonomy over methods are more likely to fall outside IR35 than those managed day‑to‑day like staff engineers.
Substitution looks at whether the contractor can provide a suitably qualified replacement. A genuine right of substitution, exercised in practice, is a strong indicator of operating on a self employed basis.
Mutuality of obligation considers whether the client is obliged to offer ongoing work and whether the contractor is obliged to accept it. Project‑based aerospace contracts with clear end points are less likely to indicate employment status.
Additional factors include financial risk, use of own equipment, integration into the client’s business, and whether the contractor operates as a genuine business on their own account. In all cases, actual working practices carry more weight than contractual wording alone.
The Problem with Blanket Determinations
Many aerospace organisations apply blanket inside IR35 decisions across entire programmes or departments. While common, this approach conflicts with the requirement to assess each engagement individually using reasonable care.
Blanket determinations reduce contractor supply, push rates up, and remove flexibility from the market. They also increase the risk of non compliance where reasonable care has not been taken on individual assessments. For contractors, they remove any opportunity to demonstrate genuine business status, regardless of how the role is structured or delivered.
In skills‑short areas such as MRO, avionics, and systems engineering, this approach is increasingly difficult to sustain.
What Aerospace Contractors Can Do About IR35
There is no single solution to IR35, but there are practical steps contractors can use when assessing roles and deciding how to operate. In more complex situations, seeking professional advice can help contractors understand their exposure before committing to an engagement:
Decide how you want to be paid before accepting a role. Working through an umbrella company removes IR35 risk but results in higher income tax and national insurance deductions.
Price roles realistically. Inside IR35 engagements often require higher day rates to offset tax deductions, particularly where skills shortages give contractors leverage.
Look for genuinely project‑based work. Outside IR35 roles are more common where deliverables are defined, autonomy exists, and the contractor controls how the work is delivered.
Align working practices with the contract. An outside IR35 written contract offers little protection if day‑to‑day reality points toward employment for tax purposes.
Challenge incorrect determinations where justified. Contractors can dispute a status determination statement, although outcomes depend on the client’s willingness to reassess.
The Outlook for IR35 in Aerospace
IR35 is now an established part of the contracting landscape. Despite political noise over the years, the private sector reform remains in place and enforcement activity is increasing.
For aerospace, the tension between tax compliance and access to specialist contractors will continue. Skills shortages are not easing, and programmes still require flexibility. Organisations that take a more considered, role‑by‑role approach to IR35 are likely to be better placed to attract and retain experienced contractors.
For contractors, understanding IR35 and pricing roles accordingly is now part of operating a limited company in this sector.
Conclusion: How to Approach IR35 as an Aerospace Contractor
IR35 does not prevent contracting in aerospace, but it changes how risk, tax and reward are balanced. Contractors who understand how employment status is assessed, and who make informed decisions about roles, rates and working arrangements, are better positioned to navigate the market.
The key is realism. Some roles will sit inside IR35, others can sit outside. Treating every engagement on its own terms is essential.
How Chevron Supports Aerospace Contractors
Chevron works closely with aerospace contractors and hiring organisations across the UK.
Our role is to help contractors interpret IR35 status, understand market rates, and identify opportunities that align with how they want to operate.
If you want an informed view on current aerospace contracts and how IR35 applies, get in touch.