IR35 Determination for Hiring Contractors in the UK

If you hire contractors through their own limited companies (often called “PSCs”), you need to be confident about your IR35 determination. Getting status right is crucial - it affects who pays Income Tax and NICs, who carries the risk, and whether your engagement model is sustainable as you grow.

Don’t stress - with a clear process, the right documents and a bit of training, you can make robust determinations and protect your business from day one.

What Is IR35 And Who Must Make The Determination?

IR35 (the “off‑payroll working rules”) aims to ensure that contractors who would be employees if engaged directly pay broadly the same tax and NICs as employees. Practically, it’s a status decision - is the engagement “inside IR35” (deemed employment for tax) or “outside IR35” (genuine self‑employment)?

Who must decide depends on your size and supply chain:

• Public sector and medium/large private sector clients must make the IR35 determination.
• Small private sector clients are exempt - in that case, the contractor’s PSC is responsible for the determination (the pre‑2021 position).
• If you must determine, you must also issue a Status Determination Statement (SDS) to the worker and the next party in the chain, and take “reasonable care”.

The off‑payroll rules sit in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), with reforms rolled out to the public sector in 2017 and to medium/large private sector clients in 2021.

Are You Exempt As A “Small” Client?

Private sector clients are “small” if they meet at least two of the following (broadly aligned with the Companies Act thresholds):

• Annual turnover of £10.2m or less
• Balance sheet total of £5.1m or less
• 50 employees or fewer

These tests apply on a group‑wide basis and look at your last financial year. If you are small, responsibility for IR35 sits with the contractor’s PSC. If you cease to be small, you’ll need to take on determinations from the next tax year.

If you work through agencies, check who is the “client” for IR35 purposes - usually the end‑user who receives the worker’s services. If you’re borderline on size, get tailored advice so you don’t accidentally fall into the regime without processes in place.

How To Make An IR35 Determination (Factors To Assess)

Start with the reality of the working practices - not just the paper contract. HMRC and tribunals look at multiple factors and weigh them together. Common areas to assess include:

1) Control

How, when and where is the work done? The more you direct daily tasks, hours or methods, the more it looks like employment. High‑level, outcome‑focused control aligns better with “outside IR35”.

2) Substitution

Is there a genuine, unfettered right for the contractor to send a suitably qualified substitute, and could that actually happen in practice? Genuine substitution supports a self‑employed model - but it must be real, not theoretical.

3) Mutuality Of Obligation (MOO)

Are you obliged to provide continuous work and are they obliged to accept it? Open‑ended, continuous obligations suggest employment. Project‑based engagements with clear deliverables lean “outside”.

4) Financial Risk And Opportunity

Does the contractor take on risk (e.g. rectifying defects at their own cost), provide their own equipment, have insurance, and price on a deliverables or fixed‑fee basis? Genuine business risk and the opportunity to profit typically indicate self‑employment.

5) Integration

Is the contractor part and parcel of your organisation (on your internal org chart, managing staff, using employee benefits), or operating as an external service provider?

6) Exclusivity And Length

Long, exclusive engagements that mirror employee roles can point “inside IR35”, whereas short, non‑exclusive projects support an independent business.

As you weigh these, it helps to step back and run an employment status sense‑check. Many small businesses find it useful to review the key employment status tests to ensure your working model aligns with your intended outcome.

HMRC’s CEST tool can be part of your process - keep a copy of inputs and results - but don’t rely on it blindly. If the tool comes back “undetermined”, or if inputs are borderline, seek advice.

Taking Reasonable Care And Creating A Status Determination Statement (SDS)

If you’re a medium/large client, the law requires “reasonable care” in making determinations and issuing an SDS. Reasonable care is not defined exhaustively, but in practice it means having a documented, fair process and applying it consistently. Consider:

• Using a structured questionnaire and recording your analysis and outcome for each engagement.
• Comparing the written terms with actual working practices - and fixing any drift.
• Training hiring managers and finance on IR35 basics and when to escalate.
• Reviewing determinations if scope, control or duration changes materially.
• Retaining evidence (CEST output, notes of interviews, draft vs final contracts) to show your reasoning.

Your SDS must state the status outcome (inside or outside IR35) and your reasons. You must give it to the worker and the next entity in the chain before the first payment. You also have to operate a “client‑led disagreement process” - if the contractor disagrees, you must respond with reasons within 45 days, confirming or changing the decision.

Where your decision is “inside IR35”, the fee‑payer (often the agency, otherwise you) must deduct PAYE and employee NICs and pay employer NICs and (where due) the apprenticeship levy.

Contracting For “Outside IR35”: Practical Tips And Documents

Contracts won’t save a bad working practice, but clear, well‑drafted documents help you reflect and maintain an “outside IR35” model. Practical tips:

• Engage on outcomes, milestones and deliverables - avoid time‑based, open‑ended roles.
• Include a genuine substitution right and a process for vetting and onboarding substitutes.
• Limit day‑to‑day supervision and specify autonomy in how and when services are performed.
• Price on a project or milestone basis where appropriate, with clear acceptance criteria.
• Address defects, insurances (e.g. professional indemnity), equipment and expense policies to reflect independent business risk.
• Keep contractor onboarding distinct from employees (no staff benefits or internal HR perks).

From a documentation perspective, most businesses will want a strong Contractor Agreement (with a separate Statement of Work for each project). Where you’re buying consulting services rather than “labour”, a tailored Consulting Agreement with outcome‑based scope and deliverables can support the intended model.

Don’t forget the surrounding legals that often sit alongside status:

• To ensure you own the outputs, include a clear IP assignment - or pair your main agreement with a dedicated IP Assignment.
• Protect confidentiality from day one (and before sharing sensitive information) with a Non‑Disclosure Agreement.
• If the contractor will process personal data on your behalf, add a GDPR‑compliant Data Processing Agreement or schedule.
• Make sure your contractor terms align with what actually happens on the ground - especially around control, substitution and mutuality of obligation.

If contractors create valuable assets, it’s worth reading more on intellectual property and independent contractors so you can build robust assignment and licence clauses into your standard documents.

What Happens If You Get IR35 Wrong? Tax, Liability And Disputes

Getting IR35 wrong doesn’t just mean an administrative tidy‑up - it can be expensive. Depending on where liability sits in your supply chain:

• HMRC can recover unpaid PAYE/NICs, employer NICs and apprenticeship levy, plus interest and penalties from the “fee‑payer” (which may be you if there’s no agency or the agency is offshore/insolvent).
• Where you failed to take reasonable care, liability can shift to you as the client - even if an agency sits between you and the contractor.
• Misaligned contracts and working practices can also lead to employment law risks (e.g. claims about worker rights). A quick refresher on worker vs employee helps to spot where those risks might creep in.

To reduce disputes, embed your client‑led disagreement process, respond within 45 days, and keep communications clear and professional. If an engagement shifts in scope (for example, you move from project‑based work to an open‑ended role), revisit your determination and, if needed, transition to an employment model with an Employment Contract rather than stretching a contractor arrangement beyond its limits.

If you engage through agencies, make sure your upstream and downstream contracts are aligned on status, SDS obligations and who is the fee‑payer. Where you loan out staff to clients, a properly structured Secondment Agreement can also help manage risk in people‑sharing scenarios.

Key Takeaways

• Work out if you’re a “small” client; if not, you must make an IR35 determination, issue an SDS and take reasonable care.
• Assess control, substitution, mutuality of obligation, financial risk and integration - and make sure working practices match your paper terms.
• Document your process: use structured questions, keep evidence, train managers and review determinations when engagements change.
• Support “outside IR35” engagements with outcome‑based scopes, real substitution rights and robust documents like a Contractor Agreement and IP Assignment.
• If contractors process personal data or handle confidential information, put a Data Processing Agreement and NDA in place alongside your main contract.
• The cost of getting it wrong can be significant (tax, NICs, penalties). Align contracts and reality, and be ready to switch to employment where the role demands it.

If you’d like tailored help with IR35 determinations, reviewing your contractor model or drafting the right documents, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no‑obligations chat.