How to assess IR35 status: a guide for end clients
The off-payroll working reform generated around £4.2 billion in additional tax, National Insurance and Apprenticeship Levy in its first two years, and touched roughly 120,000 contractors working through their own companies [1]. Since 6 April 2021 in the private sector, the legal duty to decide whether those rules apply has sat with the organisation that receives the work, not the contractor.
That shift catches many medium and large businesses off guard. An end client that engages a contractor through a limited company must now assess the working relationship, record the decision, and stand behind it if HMRC asks. Getting the assessment wrong carries a tax cost, and a rushed or blanket decision fails the legal standard of reasonable care.
This guide sets out how an end client assesses IR35 status: the three tests HMRC weighs, the status determination statement that records the outcome, the reasonable-care standard, the small-company exemption that removes the duty entirely, and what an inside-IR35 result changes on payroll.
Key takeaways
- Since 6 April 2021, medium and large private-sector clients decide the IR35 status of contractors they engage through an intermediary [1].
- The decision rests on three case-law tests: control, personal service (substitution) and mutuality of obligation [5].
- The outcome must be recorded in a status determination statement (SDS) with reasons, and passed to the worker and the labour supply chain [2].
- A CEST result alone does not prove reasonable care; the reasoning behind the determination does [4].
- An inside-IR35 engagement is taxed through PAYE by the deemed employer, who also funds employer National Insurance at 15% [3].
Who has to carry out the assessment
The off-payroll working rules apply when a worker provides services through an intermediary, usually a personal service company, to a client who would otherwise be treated as their employer for tax [1]. The rules exist to make sure someone working like an employee pays broadly the same Income Tax and National Insurance as an employee, regardless of the company structure sitting in between.
For engagements in the public sector, and for medium and large clients in the private sector, the client organisation that receives the work must decide the worker's status [1]. Where the client is a small private-sector organisation, the responsibility stays with the worker's own intermediary, which is the position that applied to the whole private sector before the 2021 reform [6].
The assessment is engagement-specific. The same contractor can be inside IR35 on one contract and outside it on another, because the tests examine the working relationship rather than the person. A client cannot assess a role once and apply the label to every contractor who fills it.
The three tests HMRC applies
HMRC does not score the tests and total them up. It weighs the whole working relationship, and a single strong factor can decide a finely balanced case [5]. Three principal tests, drawn from decades of employment case law, sit at the centre of every determination.
The table below summarises what each test asks and the evidence that points towards employment for tax.
| Test | Core question | Points towards inside IR35 |
|---|---|---|
| Control | Who decides what, how, when and where the work is done | The client directs the method, hours and location |
| Personal service | Must the worker do the job personally | No genuine right to send a substitute |
| Mutuality of obligation | Must the client offer work and the worker accept it | An ongoing expectation of continuing work |
Control
Control asks who directs the work: what is done, how it is done, when it is done and where it is done [5]. It is often the weightiest single factor. A contractor who is told which method to use, which hours to keep and which desk to sit at looks much like an employee, and a substitution clause rarely rescues an engagement where the client controls the day-to-day work [1].
A genuinely outside-IR35 arrangement typically leaves the contractor free to decide how to deliver an agreed outcome. The client specifies the result and the deadline, not the working method. Evidence such as the contractor using their own approach, working unsupervised and fixing defects at their own cost all point away from employment [5].
Personal service and the right of substitution
Employment depends on personal service. If the worker must perform the work themselves, that points towards employment; a genuine right to send a qualified substitute points away from it [5]. Many contracts include a substitution clause, but the clause has to be real. A right that both parties know will never be used, or that the client can veto for any reason, carries little weight in an assessment [1].
Substitution also weakens where the client engaged the worker for personal skill or reputation. If the contract was won because of one individual's track record, the argument that anyone else could step in becomes harder to sustain [5].
Mutuality of obligation
Mutuality of obligation asks whether the client is obliged to offer work and the worker obliged to accept it [5]. A rolling expectation that the client will keep providing tasks, and that the contractor will keep taking them, resembles an employment relationship. A single defined project with no promise of further work points the other way [1].
This is the most misunderstood of the three tests, and the one most often argued in tribunals. It is not enough that a contract exists for a fixed period; the question is whether obligations continue beyond the immediate task the parties agreed [5].
Using the CEST tool without over-relying on it
HMRC provides a free online tool, Check Employment Status for Tax (CEST), that works through a series of questions about the engagement and returns a view on status [4]. HMRC states it will stand behind a CEST result where the answers are accurate and reflect the real working arrangement [4].
CEST is a useful starting point, but a determination cannot rest on the tool alone. A result only reflects the answers fed into it, and a client that clicks through the questions without examining the actual contract and working practices has not taken reasonable care [2]. The tool can also return an undetermined outcome on finely balanced facts, at which point the client must reason the decision through itself. A detailed walk-through of the questions sits in the Moonworkers guide to the CEST tool.
The status determination statement
Once the assessment is complete, the client must record it in a status determination statement, or SDS [2]. There is no prescribed legal format, but the statement must state the status decision and set out the reasons behind it, and best practice is to issue it in writing, for example by email or letter [2].
The SDS has to reach two destinations. The client passes it to the worker, and, where a labour supply chain exists, to the agency or party it contracts with, who passes it down the chain until it reaches the organisation immediately above the worker's intermediary [2]. Until the client issues a valid SDS and takes reasonable care, the tax liability can remain with the client rather than passing down the chain [6].
A worker who disagrees can dispute the determination. The client must have a process to consider the challenge and respond within 45 days, either confirming the original decision with reasons or issuing a new SDS [2]. Accountancy firms handling determinations across several client companies often track SDS issue dates and dispute deadlines inside a multi-client payroll dashboard so nothing slips past the 45-day window.
What reasonable care means in practice
Reasonable care is the legal standard the client must meet. The determination has to be based on the actual contract and working arrangements, and a client that fails to take reasonable care becomes liable for the tax as if it were the deemed employer, even where an agency sits in the chain [6].
The clearest failure is a blanket determination: labelling every contractor in a category inside IR35 without examining individual engagements [2]. Reasonable care instead means reviewing each engagement on its facts, keeping a record of how the decision was reached, and revisiting the determination if the working practices change. A well-reasoned SDS, even on borderline facts, is the evidence that reasonable care was taken [2].
The small-company exemption
A private-sector client that qualifies as small does not have to assess status at all. The duty stays with the worker's intermediary, and the definition of small follows the criteria in the Companies Act 2006 [6]. A company is small when it meets at least two of the three conditions in the table below.
| Criterion | Small-company threshold |
|---|---|
| Annual turnover | Not more than £15 million |
| Balance sheet total | Not more than £7.5 million |
| Average employees | Not more than 50 |
The turnover and balance-sheet limits rose from £10.2 million and £5.1 million when the wider Companies Act size thresholds were increased, which widens the pool of clients that fall outside the off-payroll duty [1]. For groups, the test looks at the combined position of the whole group, not the individual hiring entity [6]. A client near the boundary should confirm its size before assuming the exemption applies, because a company that exceeds two of the limits across consecutive years loses small status.
What an inside-IR35 result changes on payroll
When a determination lands inside IR35, the fee-payer, which is the organisation that pays the worker's intermediary, becomes the deemed employer. It must deduct Income Tax and employee National Insurance from the payment through PAYE, and report the pay and deductions to HMRC on a Full Payment Submission, exactly as for a directly employed worker [3]. Software that holds the HMRC Recognised badge submits that FPS automatically and applies the current rates without manual reconfiguration.
The deemed employer also funds employer National Insurance, charged at 15% on earnings above the Secondary Threshold since 6 April 2026, plus the Apprenticeship Levy where it applies [7]. That employer charge cannot be taken out of the worker's agreed rate; deducting it would be an unlawful deduction from wages [3]. Platforms and agencies that process deemed payments at scale often embed an HMRC-recognised payroll API to run the PAYE calculation and RTI submission inside their own systems, while businesses running the payroll directly can handle the same deductions through dedicated UK payroll software. Larger engagers managing many concurrent contractors may prefer an enterprise payroll setup that keeps deemed and direct employees on one compliant run.
Conclusion
Assessing IR35 status is less about a single tool and more about a defensible chain of reasoning: examine control, personal service and mutuality of obligation against the real working arrangement, record the outcome in a status determination statement with reasons, and revisit it when the facts change. The client that documents its thinking meets the reasonable-care standard even when the result is finely balanced, while the client that applies a blanket label carries the tax risk itself.
The ground under these rules keeps moving. Higher company-size thresholds are pulling more engagers out of scope, and the balance of the three tests continues to be refined through tribunal decisions. An end client that treats status assessment as an ongoing compliance process, rather than a one-off form, is best placed to keep pace as the boundary between employment and self-employment for tax is redrawn.
Frequently asked questions
Who decides IR35 status, the client or the contractor?
For public-sector engagements and for medium and large private-sector clients, the client that receives the work decides the status and issues a status determination statement [1]. Where the client is a small private-sector organisation, the worker's own intermediary keeps that responsibility [6]. The decision is made for each engagement rather than for the individual.
Is a CEST result enough to prove reasonable care?
No. HMRC will stand behind a CEST result where the answers accurately reflect the real working arrangement, but a determination cannot rest on the tool alone [4]. Reasonable care requires the client to examine the actual contract and working practices and to record the reasoning in the SDS [2]. A blanket determination applied across a group of contractors does not meet the standard.
What happens if the client gets the assessment wrong?
A client that fails to take reasonable care becomes liable for the Income Tax and National Insurance as if it were the deemed employer, even where an agency sits in the labour supply chain [6]. That liability only passes down the chain once the client issues a valid SDS and has taken reasonable care. Keeping a documented record of each determination is the clearest protection.
Does the small-company exemption still apply to my business?
A private-sector client is exempt while it qualifies as small under the Companies Act 2006, meeting at least two of three limits: turnover not more than £15 million, balance sheet total not more than £7.5 million, and no more than 50 employees [6]. The turnover and balance-sheet limits rose from their earlier levels, which brings more clients within the exemption [1]. Groups apply the test to the combined figures of the whole group.
