IR35 and Off-Payroll Working: A Guide for UK Businesses
If a contractor works for you through their own limited company, the off-payroll working rules (usually still called IR35) decide whether they should be taxed like an employee. The question is who has to make that call, and what they have to give the contractor when they do.
This post covers who decides, the size test and its April 2025 change, the status determination statement, the disagreement process, HMRC's CEST tool, the main status factors, what to keep on file, and why sole traders are a different question.
What the rules cover
The rules apply when a worker provides services to a client through their own intermediary, usually a personal service company (PSC), and the worker would have been an employee if they were providing their services directly to that client. An intermediary can also be a partnership or another individual.
If the rules apply, the fee paid to the contractor's company is treated like employment income. The deemed employer deducts Income Tax and employee National Insurance from the fee, and pays employer National Insurance and any Apprenticeship Levy to HMRC.
Who decides
| Client | Who decides status |
|---|---|
| Public authority | The client, whatever its size (ESM10005) |
| Medium or large private or voluntary sector client | The client |
| Small private or voluntary sector client | The contractor's own company |
| Wholly overseas client with no UK connection | The contractor's own company (ESM10006) |
These rules have applied to medium and large private sector clients since 6 April 2021. Where the client is small, the contractor's company works it out under the older intermediaries legislation in Chapter 8 of Part 2 of ITEPA 2003, and accounts for any tax itself.
The size test applies only to the client. An agency in the chain has responsibilities whatever its size.
The size test, and the April 2025 change
For a company or LLP, size follows the Companies Act 2006 small companies regime. A client is medium or large if it meets at least two of three conditions for two consecutive financial years. From 6 April 2025, two of the three thresholds increased, for financial years beginning on or after that date:
| Condition | Before 6 April 2025 | From 6 April 2025 |
|---|---|---|
| Annual turnover | More than £10.2 million | More than £15 million |
| Balance sheet total | More than £5.1 million | More than £7.5 million |
| Average employees | More than 50 | More than 50 (unchanged) |
The change does not apply at once. For each tax year, the test looks at the last financial year whose accounts filing deadline ended before the tax year began. HMRC says that for a usual 12-month financial year, the earliest tax year the change can affect is 2027/28. So as of November 2026, a client that was medium-sized for 2026/27 stays in the rules for this tax year even if its new figures look small.
Groups are tested together: if the parent is medium or large, its subsidiaries apply the rules too. Clients that are not companies (partnerships, sole traders) use a turnover-only test, set out in ESM10006.
A contractor, or whoever the client contracts with, can ask the client to confirm its size for a tax year. The client must answer within 45 days of the request (or, if later, 45 days before the start of that tax year). A client that becomes small has to withdraw its status determination statements.
The status determination statement (SDS)
A medium or large client gives each contractor a status determination statement. To be valid, an SDS has to do three things (ESM10013):
- State the conclusion: whether the worker would be an employee for tax if engaged directly by the client.
- Give the reasons, in enough detail for the worker to understand them and disagree if they want to.
- Be made with reasonable care.
It goes to the worker and to whoever the client contracts with, usually the contractor's company or an agency. It should be issued on or before the date any payment is made. There is no set format: an email, a letter or an online portal will do, as long as the worker can knowingly receive it. Saying "outside IR35" in a job advert is not a valid SDS on its own.
If the SDS is not valid, the client is liable for the tax and National Insurance as if it were the deemed employer.
Reasonable care is judged against the client's size and resources. HMRC gives examples of falling short (ESM10014): a blanket decision that every contractor is inside the rules, entering inaccurate information into CEST, and not looking at a determination again after a material change. HMRC also expects clients to keep enough records to show how each decision was reached.
When the contractor disagrees
The worker, or the deemed employer, can challenge an SDS through the client-led disagreement process (ESM10015). They can do it in writing or verbally. The client then has 45 calendar days from receiving the representations to:
- confirm the SDS is correct and give its reasons, or
- withdraw it and issue a new one, saying the date the new one applies from.
If the client does not respond in time, it becomes responsible for the tax and National Insurance on further payments, whether or not it took reasonable care with the original decision. The process applies only where the client is medium, large or public sector. With a small client there is no SDS to disagree with.
HMRC's CEST tool
Check employment status for tax (CEST) gives HMRC's view of whether a worker is employed or self-employed for tax, and whether the off-payroll rules apply. HMRC says it will stand by the result as long as the information you give is accurate and the tool is used in line with its guidance. There has to be a contract in place, or one expected. The tool was last updated on 30 April 2025.
CEST is optional. If you use it, print or save the result with the answers you gave, and run it again when the terms or the way the work runs change.
The main status factors
Status turns on the whole picture, but three factors carry most of the weight. HMRC's Employment Status Manual covers each:
| Factor | The question | HMRC guidance |
|---|---|---|
| Control | Does the client decide what is done, where, when and how? | ESM0516 |
| Personal service and substitution | Must the worker do it personally, or could their company send a substitute? The right has to be genuine. | ESM0530, ESM0534 |
| Mutuality of obligation | Is there an obligation to offer work, and to do it? | ESM0543 |
Financial risk (ESM0541) and whether the worker is part and parcel of the client's organisation (ESM0545) also count. The contract matters, but so does how the work actually runs. A substitution clause nobody would ever use does not help.
The April 2024 set-off change
If HMRC finds a client got it wrong and the rules should have applied, the client owes the PAYE tax and National Insurance. Before April 2024, that could mean tax being paid twice: once by the client, and once already by the contractor and their company.
Where HMRC's assessment or another trigger event happens on or after 6 April 2024, the deemed employer's bill is now reduced by the Income Tax, National Insurance and Corporation Tax the worker and their company already paid on that income. For medium and large private sector clients this covers payments from 6 April 2021. Liabilities settled before 6 April 2024 are not reopened. The client still owes whatever the set-off does not cover.
Sole traders are a different question
The off-payroll rules are about intermediaries. A contractor you engage directly as a sole trader, with no company in between, is outside them. The question there is employment status itself: are they employed or self-employed for tax, and are they an employee, a worker or self-employed for employment rights?
GOV.UK lists the signs of self-employment: they quote for work, work without direct supervision, invoice for completed work, pay their own tax and National Insurance, and get no holiday or sick pay. It also warns that status for tax and for employment law can differ, so check both. CEST covers the tax side for sole traders too. If the answer is employed, they go on your payroll.
This is general information, not legal or tax advice. For a borderline case, ask an accountant or employment lawyer before the work starts.
What to collect and keep
For each contractor working through a company:
- the company's name and registration number, so you know who you are contracting with
- the VAT number, if they charge VAT
- a signed contract that matches how the work will run
- for a medium or large client: the SDS, the reasons, the date it was issued, and a record that the contractor received it
- any CEST result, with the answers given
- any disagreement, your reply and its date
- insurance certificates and bank details for paying invoices
The UK contractor onboarding checklist covers the rest of the paperwork.
What WorkZerk does and doesn't do
WorkZerk keeps the paperwork side in one place:
- Each contractor gets one private link and answers from their phone, with no account or password.
- They sign your SDS and your contract on the same page, by typed name and drawn signature. WorkZerk keeps the exact PDF each person signed, with the date, time, IP address and a fingerprint of the file.
- Their answers, including any disagreement and the date they sent it, are recorded on their portal.
- Insurance certificates carry an expiry date, so you can ask for the new one before the old one runs out.
What it does not do: WorkZerk does not decide anyone's status, run CEST, check a client's size, issue an SDS for you or run payroll. Those stay with you and your accountant.
Setting it up in WorkZerk
1. Turn on two-factor authentication
Asking people to upload documents needs two-factor authentication on your account. Set it up under Account, then Two-factor authentication (opens in WorkZerk in a new tab).
2. Add the UK contractor pack
Open Requests (opens in WorkZerk in a new tab), click Request packs, and open Start from a template. Pick United Kingdom and add Contractor onboarding (United Kingdom). It asks for:
- Unique Taxpayer Reference (UTR), optional, saved to a sensitive UTR field.
- Company registration number, optional, for limited companies.
- VAT number, optional.
- Public liability insurance, required, with an expiry date, and Professional indemnity insurance, optional.
- Account name, Sort code and Account number, with the account number marked sensitive.
For a contractor working through a PSC, consider making the company registration number required on the portal. Starter request packs lists the full pack.
3. Add your contract
If your contractor agreement is a PDF, add a Sign PDF request. If you would rather write it in WorkZerk, use the Terms library (opens in WorkZerk in a new tab) and a Terms request, so each acceptance is tied to the version the contractor read. See Terms and conditions.
4. Send the SDS for signature
An SDS belongs to one engagement, so each contractor gets their own. Add a Sign PDF request with that contractor's SDS inside a Section, open Limit who sees this, and tick them under Show only for specific people. Repeat for each contractor, or run one portal per engagement. Each signature records the date and time they signed.
5. Ask whether they agree
Add a Choice request: "Do you agree with the status determination?", with Yes and No. Add a Section shown only for the No answer, holding a multi-line Text request asking for their reasons. A No is your cue to start the 45 days. A contractor compliance walkthrough covers sections in more detail.
6. Send the links and review
Add contractors to the portal and send each their link. Uploads wait under Needs review on Requests (opens in WorkZerk in a new tab). See reviewing uploads.
7. Keep the record
Open Requests (opens in WorkZerk in a new tab) and click Document compliance to see whose insurance is current, expiring or missing. Use the export page (opens in WorkZerk in a new tab) to download what was submitted. See Document compliance and exporting your data.
Getting started
Start a free WorkZerk trial at workzerk.com, then work through the steps above. For employees rather than contractors, see the UK new starter checklist and right to work checks. If you get stuck, the getting started guide walks through a first portal end to end, or email us at [email protected].