Private sector IR35 reform came into effect in April 2021, extending the rules that already applied in the public sector to medium and large private sector companies. If your end client is a medium or large private sector company, they are responsible for determining your IR35 status. If the end client is a small company, you remain responsible for your own determination.
The small company exemption
A company is "small" under the Companies Act if it meets two or more of the following criteria:
- Annual turnover below £10.2 million
- Balance sheet total below £5.1 million
- Fewer than 50 employees
If your end client is small by this definition, you continue to self-determine your IR35 status, as was the case before the 2021 reform. This exemption is significant: a large proportion of contractors work for small businesses.
Medium and large clients: the SDS process
If your end client is medium or large, they must:
- Assess your IR35 status using a reasonable process (typically CEST or a specialist adviser's opinion)
- Issue a Status Determination Statement (SDS) to you and your agency
- Pass the SDS down the contractual chain
You have the right to challenge the SDS. The end client must respond to your challenge within 45 days. If they fail to respond, they assume the liability for any underpaid tax.
Who bears the liability?
| Client size | Who determines status? | Who bears tax liability? |
|---|---|---|
| Small | Contractor | Contractor's PSC |
| Medium/large | End client | Fee-payer (if SDS issued correctly); can shift to end client if process is flawed |
Blanket inside-IR35 determinations
HMRC guidance is clear that blanket determinations (deciding all contractors are inside IR35 without individual assessment) are not compliant. If your end client has issued a blanket determination, you have grounds to challenge it. Several high-profile cases have resulted in HMRC issuing guidance reinforcing that each engagement must be assessed individually.
Practical advice for private sector contractors
- Before accepting a contract, ask the client's procurement or finance team whether an SDS has been issued
- If outside IR35, ensure your contract reflects the actual working arrangements (substitution clause, no MOO, limited control)
- Review your working practices periodically to ensure they match the contract
- Consider specialist IR35 contract insurance
This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our accountant directory.