IR35 and Contractor Contracts: What You Need to Know

What Is IR35 and Who Does It Affect?

IR35 is HMRC's anti-avoidance legislation targeting contractors who work like employees but operate through a limited company or personal service company (PSC). Since April 2021, medium and large private sector clients are responsible for determining the IR35 status of their contractors.

• IR35 applies to contractors working through an intermediary, typically their own limited company
• Small companies (under 2 of: £10.2m turnover, £5.1m balance sheet, 50 employees) are exempt from making determinations
• When a small company is the client, the contractor's PSC remains responsible for determining IR35 status
• HMRC's CEST tool provides non-binding guidance but is widely criticised for inaccuracy

Contract Clauses That Affect IR35 Status

The contract alone does not determine IR35 status — HMRC looks at the reality of the working relationship. However, the contract sets the framework and should accurately reflect how the engagement actually operates. Mismatches between contract and reality are red flags.

• Right of substitution: the contractor must genuinely be able to send a substitute to do the work
• Control: the client should specify what is delivered, not how or when the work is done
• Mutuality of obligation: there should be no obligation to offer or accept further engagements
• Financial risk: the contractor should bear genuine business risk, such as fixed-price work or providing their own equipment

Status Determination Statements

Medium and large clients must issue a Status Determination Statement (SDS) for each contractor engagement, setting out whether IR35 applies and the reasons for the determination. This must be provided to the contractor and the fee-payer in the supply chain before the engagement begins.

• The SDS must give reasons for the determination, not just state inside or outside IR35
• Contractors have the right to dispute the determination through a statutory disagreement process
• The client must respond to disputes within 45 days or liability transfers to them
• Keep determination records for at least 6 years in case of HMRC enquiry

Key Takeaways

• Since April 2021, medium and large private sector clients are responsible for determining contractor IR35 status.
• Contract wording matters but HMRC looks at the reality of the working relationship — ensure they match.
• Small companies are exempt from making IR35 determinations; the contractor's PSC retains responsibility.