Key takeaways
- IR35 taxes a contractor working through their own limited company like an employee when the underlying relationship with the client would be employment.
- Public sector clients have decided status since 6 April 2017 and medium or large private sector clients since 6 April 2021; with a small client, your own company decides.
- A client is small if it meets two of three tests: turnover up to £15 million, balance sheet up to £7.5 million, and up to 50 employees.
- The client must give its reasons in a status determination statement and respond to a disagreement within 45 days.
- HMRC weighs control, personal service, mutuality of obligation, financial risk and other factors, looking at the contract and how the work is actually done.
IR35 decides whether a contractor who works through their own limited company is taxed like an employee of the client. It is also called the off-payroll working rules. For most private sector work with a medium or large client, the client now decides your status and issues a status determination statement. With a small client, your own company decides. This guide covers who decides, what each side has to do, how status is judged, and what happens if a contract is inside.
What IR35 is
The rules sit in two chapters of the Income Tax (Earnings and Pensions) Act 2003. They look past your limited company to the working relationship underneath it. If you would be an employee of the client were your company not there, the income from that engagement is taxed as employment income, with Income Tax and Class 1 National Insurance, rather than as company profit that you draw as salary and dividends (ESM8001).
Status is decided contract by contract. One engagement can be inside IR35 while another, with a different client, is outside.
Who decides your status
| Your client | Who decides | Since |
|---|---|---|
| A public sector body | The client | 6 April 2017 |
| A medium or large private or voluntary sector organisation | The client | 6 April 2021 |
| A small private or voluntary sector organisation | Your limited company | Always |
Source: GOV.UK, off-payroll working for clients and understanding off-payroll working.
Is your client small?
A company is small if it meets at least two of these three tests:
- Turnover of not more than £15 million.
- Balance sheet total of not more than £7.5 million.
- No more than 50 employees on average.
The turnover and balance sheet tests rose from £10.2 million and £5.1 million on 6 April 2025. A company has to meet the tests for two consecutive financial years before its size changes, so HMRC says the earliest tax year the new thresholds can move a client in or out of the rules is 2027/28 (ESM10006A). A small client does not have to make a status decision, but it must confirm its size if you or the company you contract with asks.
What a medium or large client must do
- Take reasonable care when deciding your status.
- Give its conclusion and the reasons for it in a status determination statement, passed to you and to whoever it contracts with, such as your company or an agency.
- Run a process for you to disagree, and respond within 45 days of receiving your disagreement.
If the client does not give reasons, or misses the 45 days, the Income Tax and National Insurance become its own responsibility. If you think a determination is wrong, use that disagreement process first, and put your reasons in writing. Source: off-payroll working for clients.
If a contract is inside IR35
With a medium, large or public sector client
The fee payer, which is the client or the agency that pays your company, is treated as your employer for that engagement. It deducts Income Tax and employee National Insurance from the fee before paying your company, and pays employer National Insurance and, where it applies, the Apprenticeship Levy itself (GOV.UK).
With a small client
Your own company works out the position. At the end of the tax year it calculates a deemed employment payment from what it received for the engagement, and pays Income Tax and National Insurance on it through payroll. That calculation allows a flat 5% deduction for running costs, which is not available when the client makes the decision (ESM8130).
How status is judged
There is no single test. HMRC's Employment Status Manual lists the factors it weighs, and the answer comes from the overall picture rather than any one of them (ESM0500):
- Control: who decides what you do, how, when and where.
- Personal service: whether you must do the work yourself or can send a substitute.
- Mutuality of obligation: whether the client has to offer work and you have to accept it.
- Financial risk, and the chance to profit from managing the work well.
- Who provides the equipment, and how you are paid.
- Whether you are part and parcel of the client's organisation.
- Sick pay, pensions and other employee-style benefits, the right to end the contract, and the length of the engagement.
HMRC looks at the written contract and at how the work actually happens day to day, so keep the two consistent and keep a record of how the work is done.
HMRC's check employment status tool
HMRC's free Check Employment Status for Tax tool asks about the contract and working practices and gives a result. HMRC says it will stand by the result as long as the information you give remains accurate and is in line with its guidance (CEST). It is worth running for any contract you are unsure of, and keeping a copy of the answers you gave.
If HMRC later decides a contract was inside
HMRC can recover the Income Tax and National Insurance that should have been deducted, with interest, and penalties can apply. Since 6 April 2024, where HMRC pursues a deemed employer for tax that should have been deducted, it can set off the tax and National Insurance you and your company already paid on that income against the bill. The set-off applies where the event that triggers it happens on or after 6 April 2024 (ESM10037).
How GoForma helps
GoForma's Start Bundle, £88 a month, includes an IR35 review on every contract, alongside your year-end accounts, Corporation Tax return, payroll for one director and FreeAgent. Our accountants are ACCA and AAT qualified. If you want to see what a contract is worth either side of the line, try the outside-IR35 contractor calculator, read how to pay yourself as a contractor, or see what contractor accountants at GoForma include.
