Contractor Legislation Unpacked

This depends on whether the engagement falls under Chapter 8 or Chapter 10 of the IR35 legislation. 

Chapter 8 (contractor responsibility):  If the end client is classified as a small company under the Companies Act 2006 (considering any group of companies it is part of), or if the end client does not have a UK permanent establishment, responsibility for determining IR35 status sits with the contractor’s limited company. If HMRC later determines the contractor should have been inside IR35, the contractor is liable for the tax. 

Chapter 10 (off-payroll working rules): For medium and large end client organisations, the end client is responsible for making the IR35 determination. 

In this case, liability initially sits with the end client. However, if the client can demonstrate that they have taken reasonable care when making the determination, liability can move to the fee payer (typically the recruitment agency or organisation paying the contractor’s limited company). 

Sole traders are not subject to IR35. 

Instead, they fall under employment status legislation, which is similar to IR35 in many respects, but is distinctly NOT IR35 

For sole traders, organisations should assess factors such as Supervision, Direction & Control (SDC) 

End clients are still responsible for ensuring the worker’s employment status is assessed correctly, but they are not required to produce a Status Determination Statement (SDS) as this only applies to engagements under Chapter 10 ITEPA (the “new” IR35 rules) involving limited companies or LLPs. 

If the end client qualifies as a small company under the Companies Act 2006, the engagement falls under Chapter 8. 

In this situation: 

This can weaken the outside IR35 position, as these responsibilities resemble those of an employee. 

However, if the contractor is responsible for project delivery, such as coordinating a team or overseeing delivery timelines, this is generally acceptable from an IR35 perspective. 

Joint & Several Liability does not apply indefinitely throughout the supply chain. 

HMRC focuses on what is known as the “relevant party.” 

In most recruitment models, this will typically be the recruitment agency supplying the worker to the end client 

If a Managed Service Provider (MSP) sits between the agency and the client, the MSP become the relevant party. 

If the end client engages workers directly through an umbrella company without an agency, then the end client themselves would be considered the relevant party. 

Not necessarily.  

IR35 only applies to engagements involving limited companies or LLPs. 

If temporary workers are employed by an agency under PAYE, IR35 does not apply. 

However, if a temporary worker is supplied via a limited company, then IR35 considerations apply and the relevant parties must determine their employment status accordingly. 

Yes. Organisations should be proactively engaging with their recruitment partners to understand how they are preparing for Joint & Several Liability changes. 

Key questions may include: 

Greater transparency and due diligence across the supply chain will be essential in reducing compliance risk. 

Some common warning signs include: 

If the financial outcomes appear too good to be true, or if the tax treatment cannot be clearly explained, it often indicates a higher compliance risk. 

If a contractor is engaged directly by the end client via their own limited company, the Joint & Several Liability rules generally do not apply. 

Instead, the organisation’s obligations remain within the IR35 framework. 

An SDS (Status Determination Statement) must contain three key elements: 

The government’s CEST (Check Employment Status for Tax) tool can produce documentation that meets these requirements. 

However, some organisations prefer additional independent assessments because the tool has certain limitations, or does not provide enough of an “admin framework” (audit trails, logs, proof of delivery for example) 

Potentially, yes. 

Under Chapter 10 ITEPA – the “new” IR35 rules, the end client is initially responsible for the determination and must demonstrate reasonable care. 

If they cannot demonstrate this, liability may remain with the end client. 

Under Joint & Several Liability, HMRC will pursue the relevant party within the supply chain. In many cases this may be the recruitment agency or intermediary, but the exact responsibility depends on how the supply chain is structured. 

Yes, but the rejection should be based on reasonable grounds, such as: 

Rejecting a substitute for reasons unrelated to capability, such as personal preference, may weaken the right of substitution, which is an important factor when determining IR35 status. 

Visibility across the supply chain is essential for compliance. 

Organisations should ensure they understand: 

If an agency is unwilling to provide transparency around this, it should be treated as a potential compliance risk. 

HMRC does not accept lack of knowledge as a defence in taxation matters. 

In an umbrella model, the umbrella company is the legal employer, so there should always be a written contract of employment between the umbrella company and the worker. 

For contractors operating through their own limited company, the arrangement is typically a contract for services between two businesses. 

While there may not always be a strict legal requirement for the contract to be written, it is strongly recommended because it: 

Informal agreements may technically exist, but relying on them is generally not advisable. 

Exact figures are difficult to confirm because most IR35 investigations are not publicly disclosed. 

However: 

Most IR35 investigations are resolved before reaching a tax tribunal, as organisations often prefer to settle rather than have the details publicly aired.