If you’re a limited company contractor, you should check how your IR35 status is going to be assessed before taking on a new contract role. The clauses in your contract are important, but so is how you carry out your work for the client.
If your contract is caught by IR35, it can significantly affect your take-home pay, which is why you need to know who assesses your IR35 status, what factors they use, and what you can do if you disagree with the outcome.
Here are some practical steps you can take both before and during a contract assignment.
1. Find out who is responsible for assessing your IR35 status
The crucial first step is to work out who decides whether the contract falls within the IR35 rules: your own limited company or your end client.
Under the off-payroll working rules (Chapter 10 of ITEPA 2003), medium and large private sector clients and public sector organisations must assess the employment status of contractors who provide their services through an intermediary, usually a limited company.
The client must take reasonable care when making its decision and provide a Status Determination Statement (SDS) which explains whether the contract falls inside or outside the IR35 rules and why.
If you work for a small client in the private sector, the original IR35 rules (Chapter 8) usually apply. Your limited company is responsible for assessing the contract and, if caught by IR35, accounting for any additional Income Tax and National Insurance due.
Either way, whether it’s your limited company or your client making the decision, the same employment status principles apply. There are special rules if your client is based entirely overseas with no connection to the UK.
2. How does the small company exemption work?
Small private sector clients are exempt from the requirement to determine contractors’ IR35 status.
For the 2026/27 tax year, a UK company will usually qualify as ‘small’ if it meets at least two of these three conditions:
- Annual turnover of no more than £10.2 million.
- Balance sheet total of no more than £5.1 million.
- An average of no more than 50 employees.
These thresholds increased to £15 million turnover and £7.5 million in balance sheet assets for financial years starting after 6th April 2025, but for IR35 puposes, these new figures are unlikely to take affect until April 2027 at the earliest.
The exemption is only used to work out who is in charge of assessing a contractor’s IR35 status. If you work for small company client, this doesn’t mean you’re automatically outside IR35.
3. What should you do if your client assesses your IR35 status?
If you work for a medium or large private sector client, or a public sector organisation, the client must assess your IR35 status and provide a Status Determination Statement (SDS) explaining its decision.
You’ll receive a copy of the SDS, as will the organisation your client contracts with, such as a recruitment agency.
If you’re found to be inside IR35, the organisation paying your limited company must normally deduct Income Tax and employee National Insurance before paying your company. It must also pay employer’s National Insurance. This is usually the recruitment agency, although if you’re working directly for the client, the client will handle the deductions.
Take some time to read the SDS carefully. Does the decision fairly reflect how you work? For example, does it accurately describe how much control the client has over how you carry out your work? If you have a genuine right to provide a substitute if you can’t work, has this been taken into account?
If you disagree with the client’s determination, you can challenge it by following the status disagreement process. Your client must respond to your concerns within 45 days and either reconfirm their original decision or issue a new SDS.
While you wait to hear back from your client, the original decision remains binding.
4. What if your own company is responsible?
If you work for a small private sector client, your company must assess whether a contract falls under IR35. This method applied to all contractors from when IR35 began in April 2000, until the off-payroll rules were introduced to the public sector in 2017 and the private sector in 2021.
If you’re working for a small client, you won’t receive an SDS, and you are responsible, not the client.
To work out whether a contract falls under IR35, you have to consider both the contractual terms and how you carry out your work (your working practices). You can learn more about these employment status tests and tax implications in our main guide to IR35.
Many contractors opt to have their contracts reviewed by an independent IR35 tax specialist. You can also use HMRC’s Check Employment Status for Tax (CEST) tool, which can help, although it doesn’t produce a definitive answer in every case.
Keep all your contract paperwork in a safe place, including any emails between you and your client. If your role changes significantly during the contract, or you take on new responsibilities, you may need to reassess your original decision.
Keep copies of your contract, project documentation and correspondence that could help explain your working arrangements. You should also reassess your position if the contract or your responsibilities change significantly.
If you decide that your contract is caught by IR35, your company must calculate and account for the additional tax and National Insurance under the Chapter 8 rules.
5. Get professional advice before accepting a contract
IR35 can be difficult to understand, especially if you’re new to contracting. Before accepting a new contract, make sure you know who’s responsible for determining your status and how an inside IR35 decision would affect your take-home pay.
For more information about how the rules work, read our main guide to IR35.
At Bright Ideas Accountancy, we work with hundreds of limited company directors and can help with the accounting and tax implications of IR35.
If you have any questions about IR35, please get in touch with our team.
