IR35 Status for Clients: Your Off-Payroll Duties
If your business is medium or large and engages contractors through their own limited companies, you, not the contractor, must decide whether IR35 applies to each engagement. You then have to tell the worker and the party you contract with, in writing, with reasons. Get it wrong and the tax bill can land on you. Small private companies are exempt from this duty, though the thresholds changed recently, so check where you stand.
TL;DR
Medium and large clients must decide the status of each worker who supplies services through an intermediary, usually a personal service company.
A valid Status Determination Statement (SDS) gives the conclusion, the reasons and confirmation that you took reasonable care.
Without a valid SDS, you become the deemed employer and carry the PAYE and National Insurance liability.
You have 45 days to answer a disagreement. Miss that deadline and the same consequence follows.
The small-company thresholds rose from April 2025, but the practical effect for off-payroll purposes is unlikely before April 2027.
Table of Contents
Who must determine IR35 status
The off-payroll working rules (IR35) shift the decision from the contractor’s own company to the organisation receiving the services. HMRC’s guidance on off-payroll working for clients sets out when this applies: you receive services from an individual through an intermediary, and you are not a small private sector business.
The question you answer is simple to state: if this person were engaged directly by you, would they be an employee for tax and National Insurance purposes? If yes, the engagement is inside IR35 and the fee payer must deduct tax and NICs. If no, it is outside.
Are you small enough to be exempt?
A private company counts as small if it meets at least two of three tests: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, or an average of no more than 50 employees. HMRC’s Agent Update confirms these figures replaced £10.2 million and £5.1 million for financial years starting on or after 6 April 2025. Small clients stay outside the client-led regime, and the responsibility remains with the contractor’s own company.
Because a company has to meet the small test across consecutive years, the practical impact starts from 6 April 2027 at the earliest. If you sit close to a line, our guide to small company thresholds in the UK explains how the tests work and how to qualify.
Deciding status: what actually counts
HMRC’s Check Employment Status for Tax (CEST) tool is the usual starting point. HMRC will stand by the result if your answers are accurate and reflect real working practices. It does not, however, replace your legal duty to take reasonable care.
The contract is only part of the picture. You need to look at:
Personal service: can the worker send a substitute? A substitution clause only matters if it is practical and would be honoured.
Control: do you decide how, when and where the work is done?
Mutual obligation: are you obliged to offer work and the worker obliged to do it personally? HMRC treats this as the irreducible minimum for an employment contract.
HMRC’s employment status manual is blunt on the gap between paper and practice. Ask yourself: would I actually let this person send someone else? Do I really control how they do the job? If the honest answer contradicts the contract, the working reality is likely to override a well-drafted “outside” agreement in an investigation.
The Status Determination Statement
You must give the SDS to the worker and to the party you contract with directly, for example an agency. HMRC’s guidance on validity and the help-to-comply notes on SDSs say a valid statement must:
State whether the worker would be an employee for tax and NICs purposes if engaged directly.
Give reasons for that conclusion, linked to specific status indicators such as control and substitution.
Confirm that you took reasonable care in reaching it.
Most errors are in step 2. A line saying “inside IR35” with no reasoning is not a valid SDS, and a failure here means you remain the deemed employer for the tax and NICs.
Worked example
Suppose you hire a freelance project manager through her limited company for six months. She works on your premises, follows your team’s processes, reports to your operations director and could not realistically send a replacement. You run CEST using those facts, keep the answers, and conclude she would be an employee if engaged directly. Your SDS says so, cites control and the lack of a practical substitution right, and confirms reasonable care. You send it to her and to the agency before work starts.
Compare a specialist engaged to deliver a defined piece of work, who decides the method, uses their own equipment and has in practice sent a qualified colleague before. That is a different assessment, and it needs its own reasoning. The two should never be handled with the same template answer.
Reasonable care and the mistakes that cost money
HMRC’s manual on reasonable care says that if you fail to take it, responsibility for deducting tax and NICs, and for paying them over, moves to you. Three pitfalls come up repeatedly:
Blanket determinations. Putting every contractor inside IR35 without looking at each engagement is treated as a failure of reasonable care. It invalidates the SDS.
Outsourcing the responsibility. You can hire a third party to run the assessment, but the legal responsibility for accuracy stays with you.
Treating it as one-off. If working practices or contract terms change mid-engagement, revisit the decision.
Keep a record of the evidence behind each determination: the CEST answers, who you spoke to, what the contract says and what happens in practice. That file is your defence in an enquiry.
Handling a disagreement
The worker or the fee payer can dispute your conclusion. Under the client-led disagreement process, you have 45 calendar days to respond. If you do not, you automatically become the deemed employer.
If the disagreement changes the result, withdraw the old SDS and issue a new one. Corrections have to go through payroll (RTI) so that tax or NICs previously withheld are put right. Deleting a record in your payroll software is not enough to correct the position with HMRC. The detailed rules are in ESM10015.
Our perspective
We work with founders and growing companies, and the pattern we see is that IR35 arrives before the finance function is ready for it. A business crosses a size threshold, or simply hires its first few contractors, and nobody owns the decision. The result is either a blanket “inside” label to be safe, or a contract template that nobody checked against reality. Both are weak positions.
Our advice is to treat each contractor engagement as a small piece of compliance in its own right. Decide before the work begins, write reasons a stranger could follow, and file the evidence with your books. Check your size status each year too, because turnover, balance sheet and headcount move as you grow. If you also engage subcontractors in construction, CIS is a separate regime, covered in our CIS guide for contractors.
— Shoaib
Keeping the paperwork in order
IR35 sits on top of ordinary payroll, bookkeeping and year-end reporting. If a contractor is deemed inside, the payments run through your payroll, so clean records matter. Our accounting packages for UK founders, startups and growing businesses run at £99 to £199 per month, covering support such as bookkeeping, payroll management, VAT filing and accounts preparation. See what is included on our site.
FAQ
Does IR35 apply to me as a client?
It does if you are a medium or large private sector business, or a public body, and you receive services from an individual through their own company or another intermediary. Small private companies are exempt. Check your turnover, balance sheet and employee numbers against the current thresholds.
What is a status determination statement?
It is your written conclusion on whether the worker would be an employee if engaged directly. It must include reasons and confirm you took reasonable care. Give it to the worker and to the party you contract with.
Can I use CEST for every contractor?
CEST is HMRC’s recommended tool, and HMRC will stand by the result when your inputs are accurate and reflect real working practices. It does not replace your duty to take reasonable care. Use it on each engagement, and record the answers.
What happens if I do not respond to a disagreement?
If you do not respond within 45 calendar days, you become the deemed employer. You then carry the tax and NICs liability for that engagement.
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