IR35 is a set of tax rules for contractors who work through their own limited company. HMRC uses IR35 to ask one question. Would you be an employee if the client hired you directly? If the answer is yes, you’re “inside IR35”. You then pay tax and National Insurance much like an employee.
For most contractors, IR35 now means the off-payroll working rules. Under these rules, a public sector body or a medium or large client decides your status, not you. This guide explains how IR35 works, who decides, and what to do if you disagree.
Disclaimer: This article gives general information. It’s not tax or legal advice. Your IR35 status depends on your contract and how you really work. Speak to a qualified accountant before you act.
Quick Answer
IR35 applies when you work through your own company but the job looks like employment. A public sector body or a medium or large client decides your status. It gives you a written Status Determination Statement. A small private-sector client leaves the decision to your company. With a public sector, medium or large client, inside IR35 means tax comes off your fees first.
What Is IR35 and Who Does It Affect?
IR35 affects contractors who supply their work through an intermediary. That’s usually their own limited company, often called a personal service company. It asks if you’d be an employee if the client hired you directly. If you’re a sole trader and bill clients yourself, IR35 doesn’t apply.
The name comes from an Inland Revenue press release in 1999. The rules started in April 2000. HMRC’s aim is simple. If you work like an employee, you should pay tax like one. A company doesn’t change that.
Today, HMRC calls the main version the off-payroll working rules. They have covered public sector clients since April 2017. Medium and large private-sector clients joined in April 2021.
IR35 only matters if you run a limited company. HMRC can still check if a sole trader is really an employee, under the normal status rules. Before you set up a company, compare a limited company with being a sole trader.
Who Decides Your IR35 Status?
Your client’s size decides who makes the call. A medium or large client, or any public sector body, decides your status. A small private-sector client leaves the decision to your own company. The size test uses turnover, balance sheet and staff numbers over two years.
Under HMRC’s size test, a company is medium or large if it meets two of these:
- turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- more than 50 employees on average
It has to meet two of them for two financial years in a row. A company below that line counts as small.
The limits are going up. Company law raised them to £15 million turnover and £7.5 million balance sheet. These higher limits apply to financial years starting on or after 6 April 2025. For most clients, the change first affects the 2027 to 2028 tax year. Some clients will move from “medium” to “small” then. Their contractors will decide their own status again.
| Client type | Who decides status | Who deducts the tax |
|---|---|---|
| Public sector body | The client | The fee payer |
| Medium or large private company | The client | The fee payer |
| Small private company | Your limited company | Your limited company |
The fee payer is whoever pays your company. That’s often a recruitment agency, not the end client.
How Do You Know if You’re Inside or Outside IR35?
Courts look at the whole working relationship, not just the contract. Three tests carry the most weight. Can you send a substitute? Does the client control how you work? Must the client offer work and must you accept it? Financial risk and being part of the client’s team also count.
Substitution. You can send a qualified substitute, and the client really accepts this. That points outside IR35. A client who insists on you personally points inside.
Control. The client sets your hours, your location and your methods. That points inside. A contractor decides how to deliver the work. The client only sets the result.
Mutuality of obligation. The client must keep giving you work, and you must keep taking it. That looks like a job. A fixed project with a clear end looks like a business.
Financial risk. You fix your price, pay for your own mistakes and buy your own kit. Those are signs of a business.
Part and parcel. You get a staff pass, manage the client’s staff or appear on their team chart. Those are signs of employment.
No single test settles it. A contract can say “outside IR35” and still fail if daily life looks like a job. HMRC looks at what really happens.
What Is a Status Determination Statement?
A Status Determination Statement, or SDS, is the client’s written decision on your IR35 status. Public sector, medium and large clients must give one, with reasons. It goes to you and to the business the client contracts with, often an agency. The SDS decides if tax comes off your fees before payment.
The client must take reasonable care when it decides. A blanket “everyone is inside” policy, with no look at each role, isn’t reasonable care.
Many clients use HMRC’s free Check Employment Status for Tax (CEST) tool. HMRC says it will stand by CEST results. The answers must be accurate and match HMRC’s guidance. You can run CEST yourself too, before you accept a role.
When an SDS arrives, do three things:
- Check the facts. Does the SDS describe your real role? Look at substitution, control and the length of the contract.
- Check the reasons. The client must explain its decision. A one-line answer with no reasons is a red flag.
- Keep a copy. Store it with your contract. You’ll need both if HMRC ever asks.
How Do You Challenge an IR35 Decision?
Use the client-led disagreement process. Write to the client, explain why you think the SDS is wrong, and include your evidence. The client must reply within 45 days of receiving your points. It either changes the decision or explains why it stands.
HMRC calls this the client-led disagreement process. You can use it, and so can the fee payer. An agency that isn’t your fee payer can’t use it.
The 45 days run from the day the client receives your points. They don’t run from the date of the SDS.
Make your case with facts, not opinions. Good evidence includes:
- emails where the client accepted or approved a substitute
- proof that you chose your own hours or methods
- quotes or fixed prices you set for the work
- your own insurance, equipment and other clients
A strong challenge is easier with expert help. Our accountants for contractors can review your contract and your real working pattern before you reply.
What Happens if You’re Inside IR35?
The fee payer takes Income Tax and employee National Insurance off your fees. It also pays employer National Insurance itself. Your company receives the rest. You lose the usual salary and dividend mix on that income. You still don’t get employee rights like sick pay.
HMRC’s guidance shows how to record that payment in your company’s accounts. Then you don’t pay tax twice on it. Ask your accountant to set this up.
You lose the lower dividend tax rates on that income. HMRC taxes it much like a salary.
Some contractors with inside roles move to an umbrella company instead. The umbrella becomes your employer and runs PAYE. That can be simpler than running a company for inside work.
What If Your Client Is Small?
Your limited company makes the IR35 decision and carries the risk. With a small private-sector client, the old IR35 rules still apply. Your company checks each contract. If it gets the answer wrong, HMRC can claim the unpaid tax from your company, plus interest and possibly penalties.
Keep a written review for each contract. Note the facts you looked at and the result. Update it if the role changes.
Check the client’s size every year too. A growing client can cross the line and become medium. Then the client takes over the decision.
How Can Contractors Protect Their IR35 Position?
Make your contract match how you really work. Keep evidence of substitution, control and financial risk. Run a business, not a job: several clients, your own insurance and your own equipment. Review each new contract before you sign, not after HMRC asks.
Get every new contract reviewed. Badly written clauses can point to employment, even when the work doesn’t.
Watch long contracts. Rolling renewals with one client for years look like a job. Plan breaks between projects where you can.
Run your company properly. File on time, keep clean records and take money out the right way. These are part of your legal responsibilities as a company director.
Getting IR35 Right
Read every SDS carefully. Challenge it within the rules if the facts don’t match. Check your clients’ size each year, because the new limits will move some of them.
DASA’s contractor accountancy service reviews your contracts, runs your company’s books and files your returns. Send us your next contract and your SDS. We’ll confirm which plan fits.
This article gives general information about IR35 and the off-payroll working rules. It’s not tax or legal advice. Rules and thresholds can change. Speak to a qualified accountant about your own contract.
Last reviewed October 2026 by Raqeeb Marzook, ACCA.
Frequently Asked Questions
What is IR35?
IR35 is a set of tax rules for contractors who work through their own limited company. If you’d be an employee when hired directly, you’re inside IR35 and pay tax much like an employee.
Who decides IR35 status?
Medium and large clients, and public sector bodies, decide your status. Small private-sector clients leave the decision to your own limited company.
How long does a client have to respond to an IR35 disagreement?
45 days from the day it receives your points. It must either change the decision or explain why it stands.
What happens if I’m inside IR35?
The fee payer deducts Income Tax and employee National Insurance from your fees and pays employer National Insurance. You don’t get employee rights like sick pay.
Does IR35 apply to sole traders?
No. IR35 only applies when you work through an intermediary, usually your own limited company.