IR35 in practice: medium and large clients

Note: this page is written for the legislation the comes into force from April 2021 onwards.

When you’re working for a medium or large private sector end client, the IR35 status of your engagement will be determined by your client (known as the “hiring firm” in HMRC’s terminology).

Your client will make a determination and issue a Status Determination Statement (SDS), explaining what their decision is, and how they’ve reached it. You will normally find that your SDS includes a copy of questions and answers used by automated tools to decide your status. If you’re not engaging with the client directly they will pass the SDS to your agent (or a chain of agents), and they are obliged to pass this on to you.

If your end client determines that you’re inside IR35 then income tax, national insurance and the apprenticeship levy will be deducted at source and you’ll be paid net of these taxes, just as if you were an employee. It’s the role of the last organisation in the chain – the “fee payer” to make these deductions and pay them to HMRC. If you’re working via a recruitment agent, it’s likely to be their responsibility.

If HMRC disagrees with your client and your IR35 status, then the liability lies with the fee payer (your agent). That’s right: the end client makes the determination, but the agent is on the hook if HMRC disagrees!

There are a couple of exceptions to this. First, if you’ve done something fraudulent to position yourself outside IR35, such as providing false answers to questions during the determination, and you’re shown to be inside IR35, you’ll become liable. Secondly, if your end client hasn’t taken “reasonable care”, or hasn’t issued an SDS, then they’ll become liable (we’ll cover reasonable care in a moment).

But whilst the liability starts with agents, it ultimately ends with clients. That’s because if you’re found to be inside IR35 and HMRC can’t recover lost taxes from your agent they’ll move up the supply chain. They’ll continue this until they ultimately reach the end client. This means, in essence, end clients need to ensure compliance throughout the entire supply chain.

On the plus side, presuming you’ve not acted in a fraudulent manner, and you’re subsequently found to be inside IR35, you won’t be liable for the tax gap. This will be a great relief for many, removing the worry of the financial impact of incorrect determinations.

There is a potential trap to be mindful of: some agents are including indemnity clauses in their contracts with contractors/consultants. These are mechanisms to transfer the liability to you. This isn’t how IR35 legislation works, this is a commercial matter and has yet to be tested. Many think it is unenforceable. Our advice is to look for these clauses and ask for them to be removed.

Reasonable care

Your end client must take reasonable care when making a determination. HMRC have provided detailed guidance and examples on this. HMRC’s guidance was updated following the off-payroll false-start in Q1 2020 and addresses many of the grievances felt by consultants and contractors at the time. For example, HMRC states the following behaviours do not constitute reasonable care:

  • Determining all consultants/contractors who use a limited company to be inside IR35, without looking at each case individually
  • Determining that large groups of similar consultants/contractors are inside IR35, without looking at each case individually
  • Not reconsidering determinations when there has been a material change in circumstances
  • Not providing proper support or training to the individuals in the end client who are responsible for making the determinations, or the individuals don’t have enough knowledge to complete them
  • Inputting inaccurate information into CEST
  • Failing to take into account all relevant evidence
  • Subcontracting the determinations to a third party and not confirming the accuracy of the determinations

PSC bans: the loophole

If end clients don’t wish to engage in supply chain IR35 compliance, there is a simple escape hatch: banning the use of limited companies by consultants and contractors and making them use umbrella companies. We’ve witnessed this behaviour in a few sectors.

By pushing individuals to use umbrella companies, no determination needs to be made. The consultant/contractor pays full employment taxes (akin to being an employee, or inside IR35).

There are many questions about the sustainability of this approach. Whilst it may be feasible for commodity contractors, such blanket approaches are likely to be problematic when end clients need consultants and contractors with in-demand or niche skills. In this case, the bargaining balance of power lies with the consultant/contractor, meaning they are in a better place to push for a fair assessment and the opportunity to work outside IR35.

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0800 033 7827

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Contact inniAccounts



0800 033 7827

Calling from overseas

+441332 460 010

Head Office

1 Derwent Business Centre
Clarke Street