Understanding who is responsible for IR35 compliance is essential for any business engaging flexible workers. Since the off-payroll working reforms took effect, the responsibility for assessing employment status shifted away from contractors in the majority of commercial engagements. Instead, the legal burden sits with the hiring organisation or end client, provided certain statutory criteria are met. For HR directors, finance leaders, procurement teams, and board members, mapping out these liabilities is critical to mitigating substantial financial and tax risks.
What is IR35 and why does it matter to your business?
IR35 is a set of tax anti-avoidance laws designed to ensure that workers who provide their services through an intermediary pay roughly the same tax and National Insurance contributions as regular employees if they work in the same way. Failing to apply these rules correctly can lead to severe financial penalties, backdated tax liabilities, and reputational damage for hiring businesses.
When a contractor operates outside IR35, they are treated as an independent business entity. If the engagement falls within IR35, the worker is deemed an employee for tax purposes. This means tax and National Insurance must be deducted at source before any payment is made. For hiring businesses, getting this wrong can result in unexpected liabilities for employer National Insurance contributions and the Apprenticeship Levy.
Who is responsible for deciding whether IR35 rules apply?
The end client or hiring organisation is responsible for determining IR35 status if it is a public authority or a medium- or large-sized private company. Under the current off-payroll working rules, the responsibility for assessing whether a contract is inside or outside IR35 lies with the organisation that receives the contractor's services.
However, this obligation only applies if the business meets the statutory definitions of a medium or large entity. If the end client is a small private sector company, the responsibility remains with the contractor's limited company to determine their own tax status.
What are the criteria for a medium or large company under IR35?
A private sector company is classified as medium or large under IR35 if it meets two or more of the following criteria in an accounting year (for financial years that begin on or after 6 April 2025):
- An annual turnover of more than £15 million.
- A balance sheet total of more than £7.5 million.
- 50 or more employees on average.
If your organisation satisfies at least two of these thresholds, you are legally required to assess the IR35 status of every limited company contractor you engage. If your business falls below these thresholds, you are classified as a small business, and the off-payroll working rules do not apply to your organisation. The responsibility for determining the contractor’s IR35 status falls to them; they can use services like IR35 Shield to easily assess it.
What is an IR35 Status Determination Statement (SDS)?
An IR35 Status Determination Statement (SDS) is a formal document issued by the hiring company that declares the contractor's deemed employment status and provides the detailed reasons for reaching that conclusion. To be an actual SDS, the hiring business must also take reasonable care when conducting the assessment. Then they should pass the completed statement directly to the contractor and any recruitment agency in the supply chain.
Failing to take reasonable care, such as applying blanket determinations across entire cohorts of contractors without assessing individual working practices, invalidates the statement. If the statement is deemed invalid, the hiring organisation becomes liable for any unpaid tax and National Insurance contributions, regardless of who ultimately pays the contractor's invoices.
Who is responsible for IR35 if the client is a small business or based abroad?
The contractor's limited company is responsible for determining IR35 status if the hiring organisation qualifies as a small business or has no UK connection. In these scenarios, the off-payroll working rules do not apply to the end client, meaning the contractor must evaluate their own contract and working arrangements to ensure tax compliance.
While some organisations and individuals rely on HMRC's Check Employment Status for Tax (CEST) tool to assist with this, the system has well-documented limitations and regularly delivers indeterminate results. Achieving genuine IR35 compliance requires a thorough evaluation of contract terms and actual working practices against established employment case law.
What happens if a contract is inside IR35?
If a contract is determined to be inside IR35, the fee-payer must deduct Income Tax and employee National Insurance contributions from the invoice amount before paying the contractor's limited company. The deemed employer, which is either the end client or the recruitment agency that directly matches the worker to the role, must also pay employer National Insurance contributions and the Apprenticeship Levy to HMRC.
When an engagement falls inside IR35, businesses and contractors often reassess their options. The contractor may choose to join the company payroll as a permanent employee, or transition to working through a compliant umbrella company. An umbrella company acts as the employer, operating Pay As You Earn (PAYE) payroll on behalf of the agency or client.
Partner with the IR35 experts at IR35 Shield
Ensuring accurate IR35 status determinations requires a robust approach that balances operational needs with legal certainty. At IR35 Shield, we provide compliance-focused businesses with the definitive tools and expert backup needed to secure your workforce.
Our team is here to help your business every step of the way. If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
