IR35 reforms overview
The phrase “IR35 reforms” refers to changes in the UK’s off‑payroll working rules which were rolled out in 2017 for the public sector and 2021 for most private‑sector contracts. The underlying test – whether you are effectively an employee for tax purposes – has not changed. What has changed is who has to assess that status and who bears the risk if it is wrong. Prior to 2021, contractors largely self‑assessed their IR35 status for private‑sector contracts, with the risk of a later HMRC challenge. Since April 2021, for medium or large private‑sector clients, the end‑client must decide whether a role sits inside or outside IR35 and must document the decision in a formal status determination statement.
Key changes at a glance
- Private sector (2021): medium and large companies must assess IR35 status for their contractors and carry the tax risk. Small businesses are exempt, so if your client meets two of the Companies Act “small company” thresholds (turnover not more than £10.2 million, balance‑sheet total not more than £5.1 million, and not more than 50 employees) the responsibility remains with your company.
- Status determination statement (SDS): the client must issue a written SDS stating whether the engagement is inside or outside IR35, along with their reasoning, and share it with you and any agency paying you.
- Disagreement process: if you disagree with an SDS you can formally challenge it; the client must consider the challenge and reply within 45 days.
- Fee‑payer obligation: when a contract is inside IR35 the fee‑payer (often the client or agency) must deduct income tax and employee National Insurance from your payments and pay employer’s NIC. If you contract directly with a small client you continue to self‑assess and operate a deemed‑payment calculation yourself.
- No retrospective enforcement: HMRC stated that information from the new off‑payroll rules will not automatically be used to open enquiries into past years unless there is evidence of fraud.
How the reforms affect contractors
For many contractors the most noticeable effect of the reforms has been a shift in client behaviour. Large organisations, wary of the tax risk, have taken a cautious approach, some now offer roles only on an “inside IR35” basis or insist on using an umbrella company. Others will still engage contractors outside IR35 but require rigorous evidence of genuine business‑to‑business working practices, such as the right of substitution and control over how and when work is done. Contract rates may be adjusted to reflect the different tax treatment: some clients offer a higher day rate for inside IR35 engagements to soften the impact on take‑home pay. If you want to continue working via your personal service company, it is essential to clarify whether your prospective client falls under the off‑payroll rules, whether they are a small business, and how they handle status determinations. If a role is advertised as “inside IR35” you should expect to be taxed at source through PAYE (either via your own company using the deemed‑payment method or via an umbrella/agency payroll). If the role is genuinely “outside IR35”, ask for an SDS confirming this and maintain records that support your independent contractor status.
Summary
The off‑payroll reforms mean that most medium and large end‑clients now decide whether your contract is inside or outside IR35 and are liable for any mistakes. Contractors should find out how a client assesses IR35 status, verify whether the client qualifies as a small company, and budget accordingly. Being informed about these changes helps you plan rates, choose between a personal service company and an umbrella, and ensure you pay the correct tax.
