IR35 Status Determination Statements: The Off-Payroll Working Rules in Practice

The Off-Payroll Working rules apply where:

• An individual provides services through their own intermediary (typically a personal service company — PSC) to an end client.
• The engagement would be employment if the PSC did not exist (the "hypothetical contract" test).
• The end client is a public-sector body, or a large or medium private-sector company.

Process:

1. The end client decides status before contract starts.
2. The end client issues an SDS to the contractor and to any agency between them. The SDS must include the decision and reasons.
3. If "inside IR35", the fee-payer (the entity immediately above the PSC in the chain, often the agency or the client) operates PAYE and NICs on payments to the PSC.
4. If "outside IR35", the contractor invoices in the usual way and is paid gross.
5. If circumstances change, the end client must reassess and issue a new SDS.

The PSC remains in existence and continues to do other work. But this specific engagement is treated as employment for tax purposes if "inside".

The test is the hypothetical contract test, drawn from decades of employment status case law:

• Mutuality of obligation: an obligation on the client to provide work and an obligation on the contractor to do it. Without mutuality, employment cannot exist.
• Control: the extent to which the client controls the work — how, when, where, and what is done. High control → employment; low control → self-employment.
• Personal service / substitution: a genuine right to send a substitute is a strong indicator of self-employment. A fettered substitution clause is weak evidence.
• Other factors: financial risk (own equipment, profit/loss), integration into the client's organisation, exclusivity, part of and parcel of the business.

Leading cases: Ready Mixed Concrete v Minister of Pensions [1968] (the basic three-step test), HMRC v Atholl House Productions [2022] (mutuality and the importance of the contract terms), Kickabout Productions v HMRC [2022] (sports broadcaster status), Northern Light Solutions Ltd v HMRC [2021].

HMRC provides CEST (Check Employment Status for Tax) — an online tool. CEST is accepted by HMRC as binding on themselves provided answers are accurate. But CEST has been criticised by tribunals for failing to include mutuality of obligation properly; contractors and clients should not rely on CEST alone.

If "inside IR35":

• The fee-payer (the entity paying the PSC) deducts PAYE income tax and employee NICs from the gross fee.
• The fee-payer pays employer's NICs and the Apprenticeship Levy on top.
• The PSC receives the net amount and accounts for it as deemed employment income.

Liability shifts back to the end client if:

• The end client did not issue an SDS.
• The SDS was not based on reasonable care.
• The end client failed to share the SDS with the contractor.

The "offset rules" (Finance Act 2024 s.4) allow HMRC to credit corporation tax and dividend tax already paid by the PSC against the IR35 PAYE/NIC bill, reducing the risk of double taxation. This was a significant reform after years of contractor concerns.

If you receive an SDS saying "inside IR35" and you disagree:

1. Use the end client's status disagreement process — mandatory under section 61T ITEPA 2003. The end client must consider your representations and issue a response within 45 days, either confirming the original decision or issuing a revised SDS.
2. If unresolved, ask HMRC for a determination of status. HMRC will consider the facts and reach a decision.
3. If HMRC supports the "inside" decision and you have continued to operate under the determination, you can appeal HMRC's decision to the First-tier Tribunal (Tax) — but this is technically complex and usually requires a specialist tax solicitor or accountant.

Contractors generally cannot sue the end client for an incorrect determination (the end client owes a duty to HMRC under tax law, not a private duty to the contractor). The disagreement process and HMRC route are the primary remedies.

Practical: if the SDS is clearly wrong, exit the contract rather than dispute. Many contractors choose to find new work over a long-running dispute with the existing client.

Small companies (under the Companies Act 2006 s.382 thresholds — currently turnover ≤£10.2m, balance sheet total ≤£5.1m, employees ≤50, meeting two of three) are exempt from the off-payroll rules. The contractor remains liable for IR35 determination in their own PSC.

This creates a significant patchwork: the same contractor may have a "client-led SDS" arrangement at a large client and a "contractor-determined" arrangement at a small client. Different rules for different engagements.

Small companies cannot opt in to the off-payroll regime voluntarily. Contractors working for small companies must do their own status determination — at risk of HMRC challenge if "outside" status was claimed wrongly.