What is IR35?
IR35 is the name commonly used for the off-payroll working rules. These rules aim to ensure that individuals working like employees pay broadly the same tax and National Insurance as employees, even if they work through their own limited company or another intermediary.
For medium and large organisations engaging contractors, the rules mean you must assess whether IR35 applies to each engagement. If it does, you (or the fee-payer in the supply chain) must deduct tax and NICs before paying the contractor's company. Get it wrong, and HMRC can pursue the client for unpaid tax, interest, and penalties.
The rules create significant compliance obligations. Understanding how they work and how to make accurate determinations is essential for organisations using contractors.
See how it works: MySupplierList tracks contractor IR35 status determinations across your supply chain.
Who is responsible?
Since April 2021, the responsibility for determining IR35 status in the private sector sits with the end client (if they are medium or large). Previously, the contractor's own company made this determination.
Medium and large organisations
If you meet two or more of these criteria, you are responsible for IR35 determinations:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees
Small organisations
If you are a small organisation (below those thresholds), the contractor's company remains responsible for determining status. You still need to check you are engaging with genuine small companies if claiming this exemption.
The supply chain
If you engage contractors through agencies or other intermediaries, the determination responsibility still sits with the end client. However, the fee-payer (the entity that pays the contractor's company) is responsible for operating PAYE if the contractor is inside IR35.
Related reading: Contractor insurance requirements: what to verify
Making status determinations
For each contractor engagement, you must assess whether, if the contractor were engaged directly rather than through a company, they would be an employee.
Key factors to consider
No single factor determines status. HMRC and courts consider the overall picture, but certain elements carry significant weight:
Personal service
Must the contractor do the work personally, or can they send a substitute? A genuine right of substitution points towards being outside IR35. If you expect the specific individual to do the work and would not accept someone else, that looks more like employment.
Control
How much control do you exercise over what, when, how, and where the work is done? Telling a contractor exactly how to do the work, setting their hours, and requiring them to work on your premises points towards employment. Specifying outcomes but leaving methods to them points towards genuine self-employment.
Mutuality of obligation
Is there an ongoing obligation to provide work and for the contractor to accept it? Genuine self-employment often involves project-based work without ongoing commitments. Employment-like arrangements involve continuous mutual obligations.
Other factors
- Financial risk: Does the contractor bear genuine financial risk?
- Equipment: Do they provide their own equipment?
- Part of the organisation: Are they integrated into your team?
- Right to work elsewhere: Can they work for other clients?
Explore the platform: MySupplierList stores status determinations and the reasoning behind them.
The CEST tool
HMRC provides the Check Employment Status for Tax (CEST) tool to help determine IR35 status. It is free to use and HMRC will stand by the result if the information entered is accurate and the engagement reflects reality.
How it works
CEST asks a series of questions about the engagement and provides a determination: employed for tax purposes (inside IR35), self-employed (outside IR35), or unable to determine.
Limitations
CEST has been criticised for producing 'undetermined' results too often and for not fully reflecting case law. Some engagements genuinely sit in grey areas. For complex or high-value engagements, specialist advice may be needed.
Keeping records
Save CEST results as evidence of your determination process. If HMRC later challenges a decision, showing you used their tool and answered honestly provides some protection.
Status Determination Statements
When you determine that IR35 applies (or does not apply), you must provide a Status Determination Statement (SDS) to the contractor and anyone in the supply chain above them.
What the SDS must include
- Your conclusion on whether IR35 applies
- The reasons for that conclusion
Timing
Provide the SDS before the contractor starts work. Determinations should be made as part of the engagement process, not retrospectively.
If the contractor disagrees
Contractors can challenge your determination. You must have a process to consider these challenges and respond within 45 days. If you change your determination following a challenge, issue an updated SDS.
See how it works: MySupplierList generates and tracks Status Determination Statements.
Practical compliance steps
Build IR35 into procurement
Do not treat IR35 as an afterthought. Include status assessment in your contractor engagement process. Before agreeing terms, understand whether IR35 applies and what that means for costs and administration.
Assess the role, not the person
Focus on how the engagement will work in practice, not on what the contractor wants the answer to be. The same individual might be inside IR35 for one engagement and outside for another, depending on the nature of the work.
Document everything
Keep records of how you reached determinations, what evidence you considered, and any challenges received. If HMRC enquires years later, you need to demonstrate you took reasonable care.
Review regularly
If the nature of an engagement changes significantly, reassess. A contractor who started with a defined project may evolve into a more embedded role over time.
Consider blanket approaches carefully
Some organisations have taken blanket positions (treating all contractors as inside IR35 or refusing to engage through limited companies). This avoids case-by-case assessment but can cause problems: overpayment of tax, loss of good contractors, or failure to apply rules correctly.
Consequences of getting it wrong
If you wrongly determine outside IR35
HMRC can pursue the fee-payer (often you) for unpaid tax, NICs, interest, and potentially penalties. Tax can be backdated multiple years. In supply chain arrangements, liability can transfer up the chain if parties do not comply with their obligations.
If you wrongly determine inside IR35
The contractor pays more tax than necessary. They may challenge your determination or choose not to work with you. Overly cautious approaches can affect your ability to attract talent.
Due diligence defence
Taking reasonable care in making determinations provides some protection. Using CEST, seeking advice for complex cases, and documenting your reasoning demonstrates reasonable care.
FAQs: IR35 compliance
Does IR35 apply to all contractors?
Only to those working through intermediaries (typically personal service companies). Sole traders and those on direct contracts are not within IR35, though other employment status rules may apply.
What if CEST gives an undetermined result?
Consider seeking specialist advice. You still need to make a determination. Document the factors pointing each way and make a reasoned decision.
Can we require contractors to have insurance against IR35 risk?
You can require it, but insurance does not remove your liability if determinations are wrong. It may provide the contractor with protection, not you.
How do we handle agencies?
You remain responsible for the determination. The agency, as fee-payer, operates PAYE if inside IR35. Communicate your determination clearly through the supply chain.
Building IR35 compliance into operations
IR35 compliance requires integrating status assessment into how you engage contractors. Treating it as a procurement issue rather than a tax afterthought prevents problems. Assess before engaging, document your reasoning, provide proper statements, and maintain records.
Organisations that do this well treat IR35 as one element of contractor management alongside insurance verification, right to work checks, and capability assessment. Systematic approaches prevent gaps and create defensible records.
Ready to simplify contractor compliance? Join the Founding Partner waitlist to see how Compliance Cover tracks IR35 determinations, insurance, and contractor documentation in one place.