IR35 Inside or Outside Who Decides and SDS Explained

An IR35 decision can change how a contractor is paid, how much tax and National Insurance is deducted, and sometimes whether a contract is financially worthwhile at all. But one of the biggest sources of confusion is surprisingly basic: who is actually responsible for deciding whether an engagement is inside or outside IR35?

For many contractors working through a personal service company (PSC), the answer depends on the type and size of the client. For public-sector clients and medium or large private- or voluntary-sector organisations, the client generally makes the status determination. For a small private-sector client, responsibility normally remains with the contractor's intermediary, such as their PSC.

Where the client is responsible, it should give the worker and relevant party in the contractual chain a Status Determination Statement (SDS). An SDS is not simply a document saying "inside IR35" or "outside IR35". A valid SDS must state the conclusion, explain the reasons for it and show that the client took reasonable care when reaching the decision.

That distinction matters. An organisation cannot make a reliable IR35 decision simply by looking at the contractor's job title, using a blanket policy or deciding that every contractor is inside the rules. The assessment concerns the actual engagement and whether the individual would have been an employee or office holder if they had been engaged directly by the client.

This guide explains how the decision works, what "inside" and "outside" IR35 mean, what an SDS should contain, what factors influence the decision, and what you can do when you believe the determination is wrong.

What does IR35 inside or outside actually mean, and who makes the decision?

What does "inside IR35" mean?

Inside IR35 means the off-payroll working rules apply to the engagement.

The underlying question is not simply whether someone operates through a limited company. HMRC's test asks whether the worker would have been an employee for tax purposes if they had been engaged directly by the client rather than through an intermediary.

If the rules apply, the relevant fee-payer or deemed employer is generally responsible for deducting Income Tax and employee National Insurance contributions and accounting for employer National Insurance as required.

For a contractor, the practical consequence can be significant. The contractor may still have a PSC, but the engagement is treated for tax purposes broadly as employment income rather than ordinary business income.

What does "outside IR35" mean?

Outside IR35 means the off-payroll working rules do not apply to that engagement.

That does not automatically mean the contractor is self-employed in every possible legal sense. It means the particular engagement does not meet the conditions for the off-payroll working rules.

The contractor's company can therefore generally receive the contract payment without the deemed-employment tax treatment that applies to an inside-IR35 engagement, subject to the company's normal tax and accounting obligations.

An outside determination should not be confused with a guarantee that every future contract will also be outside IR35. Employment status is assessed on the circumstances of the particular engagement.

Who decides IR35 status?

The answer depends primarily on the client.

The off-payroll rules apply to public-sector clients and medium or large private- and voluntary-sector organisations. A private or voluntary-sector organisation is generally treated as medium or large when it meets at least two of these conditions: annual turnover above £10.2 million, balance-sheet total above £5.1 million, or more than 50 employees.

The size test matters because it determines who carries the responsibility for the off-payroll decision.

Why does the client's size matter so much?

The reforms introduced from April 2021 shifted responsibility for determining status from the contractor's intermediary to the public-sector client and to medium and large private- and voluntary-sector clients. Small private-sector organisations were excluded from that transfer of responsibility.

So two contractors doing very similar work can face different processes simply because their clients fall into different size categories.

For example, imagine a freelance software developer who works through their PSC.

• Client A is a large financial services company. Client A is responsible for determining the engagement's status.
• Client B is a small independent consultancy. The contractor's PSC remains responsible for determining status.
• Client C is a government department. The public authority determines status.

The nature of the work still matters in every case, but the party legally responsible for the determination changes.

What is a Status Determination Statement?

A Status Determination Statement, or SDS, is the formal written statement communicating the client's IR35 status decision and the reasons for reaching it.

For a valid SDS, HMRC says the client must:

1. State whether the worker would have been an employee or office holder if engaged directly.
2. Give the reasons for reaching that conclusion.
3. Take reasonable care when making the determination.

That means an SDS should contain more than a conclusion.

A document saying:

"This engagement is outside IR35."

may communicate a decision, but by itself it does not satisfy the full requirements of a valid SDS because the reasons and reasonable-care requirement also matter.

HMRC specifically says that advertising a role as "inside IR35" or "outside IR35" is not, on its own, enough to constitute a valid SDS.

Who should receive the SDS?

Where the client is responsible for the off-payroll decision, it should communicate the SDS to the worker and the relevant third party it contracts with.

This is important in agency arrangements.

A typical chain might look like:

Client → Recruitment agency → Contractor's PSC → Contractor

The client makes the status determination where the rules place responsibility on it, but the determination needs to move through the contractual chain so the relevant parties know the conclusion and reasons. HMRC also provides specific rules governing how responsibility can move through a labour supply chain.

What does the client actually assess?

The client is effectively asking a hypothetical question:

"If we engaged this individual directly, would they be an employee or office holder for tax purposes?"

That means the assessment focuses on the real relationship rather than simply the wording of the contract.

Important considerations can include:

• Control over how the work is performed
• Control over when and where work is performed
• Personal service
• Whether a genuine right of substitution exists
• Mutuality of obligation
• Financial risk
• Opportunity to make a profit
• Whether the contractor can provide services to other clients
• The level of integration into the client's organisation
• Provision of equipment
• How the relationship operates in practice
• The contractual terms
• The parties' actual conduct

No single factor automatically determines the result in every case.

Why control matters

Control is one of the areas that can materially affect employment status.

For example, a contractor may be highly skilled and technically independent, but that does not automatically make the engagement outside IR35.

The question is broader.

Does the client have the right to determine important aspects of how, when or where the work is performed?

HMRC's CEST guidance, for example, considers whether a hirer has the right to decide the worker's hours. Even where flexible arrangements exist, a client retaining the right to establish core working hours can still be relevant to the assessment.

Consider two hypothetical developers.

Developer A is hired to deliver a defined software migration. They decide how to complete the

work, have substantial autonomy over their schedule and are responsible for achieving agreed deliverables.

Developer B joins an internal development team, follows the client's working hours, reports to a line manager, works under the client's day-to-day direction and performs the same ongoing duties as employees.

Their job titles might both say "software developer". Their IR35 outcomes could nevertheless be different because the working relationships are different.

Why substitution matters

A genuine right of substitution can be relevant because a genuine business providing services is not necessarily required to provide one particular individual personally.

But the word genuine matters.

A contract that contains a substitution clause is not automatically outside IR35. If the clause is unrealistic, heavily restricted or never capable of being exercised in practice, it may carry little weight.

A useful practical question is:

Could the contractor realistically send a suitably qualified substitute to perform the work, subject to the agreed contractual requirements?

The answer needs to be considered alongside the other factors.

Why mutuality of obligation matters

Mutuality of obligation broadly concerns what each party is required to provide to the other.

An employment relationship normally involves an ongoing expectation that the employer provides work and the employee performs it, subject to the employment relationship.

A project-based contractor relationship may instead revolve around specific deliverables, defined services and agreed commercial obligations.

Again, this is not a one-question test. The overall relationship has to be considered.

Does the contract decide IR35?

No. The written contract matters, but the contract is not the whole story.

This is one of the most important points for contractors and clients.

A beautifully drafted contract can describe an outside-IR35 relationship, but if the parties actually operate it like employment, the working practices may undermine the contractual position.

Conversely, a contract should not be ignored simply because the engagement is operationally complex.

The strongest assessment considers both:

What does the contract say?

and

What actually happens?

The difference between those two can be particularly important where an engagement has changed over time.

Can a client make one blanket IR35 decision for all contractors?

A client should not simply declare every contractor inside or outside IR35 regardless of the individual engagements.

HMRC's contractor guidance states that clients cannot apply a blanket status assessment to all contractors irrespective of contractual terms and actual working arrangements. An assessment covering a group of workers may sometimes be appropriate where the roles, working practices and contractual terms genuinely align, but that is different from automatically applying one outcome to everyone.

For example, a large business might have 30 contractors working under materially identical arrangements. A common assessment may be defensible if the facts genuinely match.

But saying "all contractors are inside IR35 because company policy says so" is not the same thing as carrying out a reasonable assessment.

What does "reasonable care" mean for an SDS?

Reasonable care is more than ticking a compliance box.

The client should gather enough information to understand the engagement, consider the relevant employment-status principles and reach a reasoned conclusion.

Poor practices can include:

• Making decisions before understanding the actual role
• Copying an old determination without checking current facts
• Relying solely on a contractor's job title
• Treating all contractors identically without considering differences
• Using a questionnaire mechanically without assessing the answers
• Ignoring how the engagement operates in practice
• Issuing a conclusion without meaningful reasons

HMRC says that if an SDS does not satisfy the requirements for a valid determination, responsibility for deductions and related payments can remain with the client.

What if the contractor disagrees with the SDS?

A disagreement does not mean the contractor can simply replace the client's decision with their own.

There is a formal client-led status disagreement process.

A worker or deemed employer can raise a disagreement with the client. The legislation requires the client to respond within 45 calendar days. The client must either confirm that the original determination remains correct and give reasons, or withdraw it and issue a new determination where appropriate.

This gives contractors a practical route to challenge an IR35 decision without immediately turning the matter into a formal tax dispute with HMRC.

What should you include in an IR35 disagreement?

A strong disagreement should be evidence-led rather than emotional.

Instead of writing:

"I have always been self-employed, so this must be outside IR35."

explain the specific facts that support your position.

For example:

• The deliverables are clearly defined.
• The client does not control the method used to complete them.
• There is a genuine substitution provision.
• You bear meaningful financial risk.
• You provide your own specialist equipment.
• You work independently rather than under line management.
• The engagement is project-based rather than an ongoing employee role.
• You have genuine responsibility for correcting defective work.
• You are able to provide services to other clients.

The strongest evidence is evidence that describes the actual engagement.

Can an SDS change during a contract?

Yes. An SDS should reflect the engagement as it exists, and a determination may need to be revisited if the circumstances materially change.

Suppose a contractor begins with a six-month project and substantial autonomy.

Six months later, the project ends but the contractor is retained indefinitely, works the client's standard hours, attends daily team meetings, reports to a manager and performs an ongoing employee-like function.

The original assessment may no longer accurately describe the relationship.

The practical lesson is simple: IR35 status is not something to set once and forget forever.

Changes to working practices, contract terms, control, substitution arrangements or the nature of the services can justify another review.

Is HMRC's CEST tool enough to decide IR35?

HMRC provides the Check Employment Status for Tax (CEST) tool to help determine employment status for tax and National Insurance purposes.

CEST can be used by both hirers and workers, and HMRC says workers can use it to check a determination made by a hiring organisation.

The tool can produce outcomes including:

• IR35/off-payroll rules apply
• IR35/off-payroll rules do not apply
• Self-employed for tax purposes
• Employed for tax purposes
• Unable to make a determination

HMRC recommends retaining the result, including the answers and reasoning provided.

CEST can therefore be useful evidence and a practical starting point. But the quality of the result depends heavily on the accuracy and completeness of the information entered.

If a client enters answers that do not accurately reflect the engagement, a technically correct tool output can still produce a poor real-world assessment.

What should a contractor check when receiving an SDS?

Don't look only at the words "inside" or "outside".

Check:

1. Is the conclusion clearly stated?

You should be able to identify the status determination without guessing.

2. Are the reasons explained?

A valid SDS must include reasons for the conclusion.

3. Does it describe your actual engagement?

Compare the SDS against the work you really perform.

4. Has the client considered the important status factors?

Look for evidence of consideration of control, personal service, substitution, financial risk and other relevant factors.

5. Has the engagement changed?

An old SDS may not accurately reflect new working arrangements.

6. Is there a dispute process?

If you disagree, respond with specific evidence and use the formal disagreement route.

What should a client do before issuing an SDS?

A sensible process is:

1. Confirm who is responsible for the determination.
2. Confirm the client's size and sector.
3. Understand the contractual chain.
4. Review the written contract.
5. Speak to people who understand how the work actually operates.
6. Assess the relevant employment-status factors.
7. Use CEST where appropriate.
8. Record the reasoning and evidence.
9. Make the determination.
10. Issue the SDS to the required parties.
11. Keep the assessment under review if circumstances change.

The process should be proportionate, but it should also be meaningful.

Inside versus outside IR35: what changes financially?

The tax treatment can make an inside-IR35 engagement less attractive to a contractor than an outside-IR35 engagement at the same headline day rate.

However, comparing only the headline rate can be misleading.

A contractor should consider:

• Income Tax
• Employee National Insurance
• Employer National Insurance and who bears its cost commercially
• Pension arrangements
• Accountancy costs
• Insurance
• Paid holiday
• Sick pay
• Employment benefits
• Gaps between contracts
• Business expenses
• Commercial risk
• The ability to work for multiple clients

An inside-IR35 contract can still be worthwhile. An outside-IR35 contract is not automatically better if the rate is substantially lower or the commercial terms are poor.

The right comparison is the overall financial and professional package, not simply "inside versus outside".

What are the most common IR35 mistakes?

Treating the contract label as decisive

Calling someone a "consultant" does not make them a consultant for tax purposes.

Assuming a limited company means outside IR35

Operating through a PSC is precisely the type of intermediary arrangement that can bring the off-payroll rules into consideration.

Assuming an outside SDS is permanent

An SDS relates to an engagement and its relevant circumstances. If those circumstances change, the conclusion may need review.

Using a blanket inside determination

A company-wide policy cannot replace an assessment of the relevant facts.

Ignoring actual working practices

If the contract says one thing but the parties consistently do another, the difference needs attention.

Disagreeing without evidence

A contractor is much more persuasive when they can point to specific contractual and operational facts rather than simply stating that the determination feels unfair.

What happens when there is an agency in the middle?

Agency arrangements often cause confusion because there can be several organisations in the contractual chain.

Suppose:

End client → Agency → PSC → Contractor

The client may be responsible for deciding status, while the agency may become the party responsible for making the relevant tax deductions depending on where the SDS sits in the chain and the statutory conditions.

HMRC describes the deemed employer as the qualifying person or organisation at the relevant point in the chain above the worker's intermediary and explains how responsibility can pass through the chain when the SDS is communicated.

For contractors, this means you should not assume that the organisation sending your payment is necessarily the organisation that originally made the IR35 decision.

What should businesses prepare for as IR35 compliance evolves?

The broad direction is unlikely to be a return to the old model where every contractor simply decides their own status regardless of the client.

The post-2021 framework places significant responsibility on public-sector and medium or large private- and voluntary-sector clients.

Technology will also continue to influence how organisations document employment-status decisions. Digital questionnaires, contract-management systems and automated compliance workflows can make assessments faster, but automation does not remove the need for accurate facts and informed judgment.

A future-proof approach is therefore not to search for a magic IR35 checklist. It is to build a repeatable process for understanding:

the contract + the actual working practices + the commercial relationship + changes over time.

For contractors, keeping contemporaneous records can also be valuable. If your working arrangements demonstrate genuine autonomy, project responsibility, financial risk or other relevant characteristics, evidence created during the engagement is generally more useful than reconstructing the relationship after a dispute arises.

When should you get professional IR35 advice?

Professional advice can be particularly valuable where:

• The contract is commercially significant.
• The SDS conflicts with the actual working relationship.
• The engagement has unusual contractual terms.
• Substitution is important to the business model.
• The supply chain contains multiple agencies.
• The client and contractor disagree about key facts.
• The financial consequences of an inside determination are substantial.
• A previous determination is being reconsidered.
• The engagement has changed materially.

An accountant, employment-status specialist or tax adviser can help examine the evidence and apply the relevant rules. HMRC also provides information and support concerning off-payroll working and CEST.

The goal should not be to obtain an "outside IR35" answer at any cost. The goal is to reach a defensible determination based on the actual engagement.

Key Insights

• The client usually decides IR35 for public-sector and medium or large private- and voluntary-sector engagements.
• For a small private-sector client, the contractor's intermediary generally remains responsible for the status decision.
• An SDS is more than an inside/outside label: it must state the conclusion, explain the reasons and reflect reasonable care.
• The written contract matters, but actual working practices matter too.
• Control, personal service, substitution, financial risk and the wider relationship can all affect status.
• Clients should not automatically apply one blanket IR35 outcome to every contractor.
• A worker or deemed employer can challenge an SDS through the client-led disagreement process, with the client required to respond within 45 calendar days.
• A material change in working practices can mean that an earlier determination needs to be reviewed.

Frequently Asked Question

1. Who decides whether a contractor is inside or outside IR35?

For public-sector and medium or large private- or voluntary-sector clients, the client normally determines whether the off-payroll working rules apply. For a small private-sector client, the contractor's intermediary normally remains responsible for the decision.

2. What is an SDS in IR35?

An SDS is a Status Determination Statement. It communicates the client's conclusion about whether the worker would have been an employee or office holder if directly engaged and gives the reasons for that conclusion.

3. Does an SDS have to give reasons?

Yes. A valid SDS must include the status conclusion, the reasons for reaching it and evidence that the client took reasonable care when making the determination. A simple "inside" or "outside" label is not enough.

4. Can a contractor decide that an engagement is outside IR35?

Where the client is legally responsible for the determination, the contractor cannot replace the client's SDS with their own preferred conclusion. However, the contractor can challenge the determination through the client-led disagreement process and provide evidence supporting a different view.

5. Can a company put every contractor inside IR35?

A client should not make a blanket decision that applies to every contractor regardless of their contracts and working practices. A group assessment may sometimes be appropriate where the relevant engagements genuinely have the same characteristics, but the client must take reasonable care.

6. Does having a limited company automatically make you outside IR35?

No. IR35 specifically considers situations where an individual provides services through an intermediary such as a personal service company but would have been an employee if engaged directly. Operating through a company therefore does not by itself determine the result.

7. What happens if the client does not issue an SDS?

Where the client is responsible for the determination, the worker can ask for the status determination and, where relevant, the client's size. Failure to provide a valid SDS can affect where responsibility for tax and National Insurance deductions sits.

8. How long does an IR35 disagreement take?

The statutory client-led disagreement process requires the client to respond within 45 calendar days of receiving the disagreement. The client must either confirm the original determination with reasons or withdraw it and issue a new determination.

9. Can an SDS be changed after it has been issued?

A determination can be withdrawn and replaced where the client concludes that the original decision was wrong. A change in the circumstances of an engagement can also mean the status needs to be reconsidered.

10. Does the contract decide IR35 status?

No. The contract is important evidence, but status is assessed using the relevant employment-status principles and the actual relationship. A mismatch between contractual terms and working practices can create significant uncertainty.

11. What is the difference between inside and outside IR35?

Inside IR35 means the off-payroll working rules apply and the relevant deemed-employment tax treatment is triggered. Outside IR35 means those rules do not apply to that engagement.

12. Can HMRC's CEST tool determine IR35 status?

CEST is HMRC's online tool for employment-status decisions for tax and National Insurance. It can be used by hirers and workers, and its output can provide a useful record of the answers and reasoning used.

13. What factors are important in an IR35 assessment?

Important considerations can include control, personal service, substitution, mutuality of obligation, financial risk, opportunity for profit, integration, equipment, contractual terms and actual working practices. No single factor should automatically be treated as decisive.

14. Does an outside IR35 decision apply to all future contracts?

No. IR35 status is connected to the particular engagement and its circumstances. A new contract or significant change in working practices can produce a different result.

15. Should a contractor challenge an inside IR35 SDS?

If the determination does not accurately reflect the engagement, challenging it can be appropriate. The strongest challenge identifies specific factual or contractual issues and provides evidence rather than relying only on the contractor's preferred tax outcome.

Final Thoughts

The phrase "inside or outside IR35" sounds like a simple yes-or-no question, but a proper determination is really an assessment of the relationship between the client and the worker.

For larger private-sector and public-sector engagements, the client normally carries the responsibility for making that assessment and issuing the SDS. For smaller private-sector clients, that responsibility generally remains with the contractor's intermediary.

The SDS itself is important because it shows more than the final answer. It should explain why the client reached its conclusion and demonstrate that reasonable care was taken.

For contractors, the best protection is not simply finding an outside-IR35 label. It is making sure the contract and the day-to-day reality tell the same story.

For clients, the strongest approach is to assess each engagement carefully, document the reasoning and revisit the position when circumstances materially change.

If an SDS says "inside IR35" and you believe that is wrong, don't stop at disagreeing with the headline. Examine the reasons, compare them with the real working arrangements, gather evidence and use the formal disagreement process where appropriate. That turns an IR35 disagreement from an argument about labels into a discussion about facts.

Disclaimer: The information provided in this article is for general informational and research purposes only. Company details, features, services, and market positions may change over time. Readers are advised to visit official company websites and conduct independent research before making any business decisions or purchasing services.