What happens if the client gets the IR35 determination wrong?

If HMRC investigates and decides a contract was inside IR35 when the client determined it was outside, the liability falls on the client (or the fee-payer in the supply chain), not on you as the contractor. This shifted in April 2021 for medium and large businesses. For small company clients, the contractor still bears the risk.

Does IR35 apply to sole traders?

IR35 specifically targets contractors working through intermediaries, usually a personal service company. If you are a sole trader invoicing clients directly, IR35 does not apply to you in the traditional sense. However, HMRC could still challenge your employment status under general employment law if they believe you are a disguised employee.

Can I appeal a client's IR35 determination?

Yes. If the client determines your engagement is inside IR35 and you disagree, you have the right to challenge it through the client's internal status disagreement process. The client must respond within 45 days. If you are still not satisfied, you can escalate to HMRC, though this is a longer process.

Does being inside IR35 mean I am an employee?

No. Being inside IR35 means you are taxed similarly to an employee for that specific engagement, but you do not gain employment rights such as holiday pay, sick pay, pension contributions, or unfair dismissal protection. You remain a contractor in all other respects.

How does IR35 affect my invoice amount?

If you are outside IR35, you invoice your full rate and handle your own tax. If you are inside IR35, you still invoice your full gross rate, but the fee-payer deducts income tax and employee NI before paying you. Some contractors negotiate a higher gross rate on inside IR35 contracts to account for the additional tax burden.

Can I claim late payment interest on the gross or net amount?

You claim late payment interest on the gross invoice amount, which is the full amount stated on your invoice before any tax deductions. The tax deductions are the fee-payer's obligation under PAYE, but the debt owed to your PSC is the gross amount.

What is a blanket IR35 determination?

This is when a client decides that all contractors working for them are inside IR35, regardless of individual circumstances. While not illegal, blanket determinations are not compliant with the rules, which require each engagement to be assessed individually. You can challenge a blanket determination through the client's disagreement process.

What happens if the client gets the IR35 determination wrong?

If HMRC investigates and decides a contract was inside IR35 when the client determined it was outside, the liability falls on the client (or the fee-payer in the supply chain), not on you as the contractor. This shifted in April 2021 for medium and large businesses. For small company clients, the contractor still bears the risk.

Does IR35 apply to sole traders?

IR35 specifically targets contractors working through intermediaries, usually a personal service company. If you are a sole trader invoicing clients directly, IR35 does not apply to you in the traditional sense. However, HMRC could still challenge your employment status under general employment law if they believe you are a disguised employee.

Can I appeal a client's IR35 determination?

Yes. If the client determines your engagement is inside IR35 and you disagree, you have the right to challenge it through the client's internal status disagreement process. The client must respond within 45 days. If you are still not satisfied, you can escalate to HMRC, though this is a longer process.

Does being inside IR35 mean I am an employee?

No. Being inside IR35 means you are taxed similarly to an employee for that specific engagement, but you do not gain employment rights such as holiday pay, sick pay, pension contributions, or unfair dismissal protection. You remain a contractor in all other respects.

How does IR35 affect my invoice amount?

If you are outside IR35, you invoice your full rate and handle your own tax. If you are inside IR35, you still invoice your full gross rate, but the fee-payer deducts income tax and employee NI before paying you. Some contractors negotiate a higher gross rate on inside IR35 contracts to account for the additional tax burden.

Can I claim late payment interest on the gross or net amount?

You claim late payment interest on the gross invoice amount, which is the full amount stated on your invoice before any tax deductions. The tax deductions are the fee-payer's obligation under PAYE, but the debt owed to your PSC is the gross amount.

What is a blanket IR35 determination?

This is when a client decides that all contractors working for them are inside IR35, regardless of individual circumstances. While not illegal, blanket determinations are not compliant with the rules, which require each engagement to be assessed individually. You can challenge a blanket determination through the client's disagreement process.

Contractor tax

IR35 basics for UK contractors

The off-payroll working rules affect how you invoice, how you get paid, and how much tax is deducted. Here is what you actually need to know.

What is IR35?

IR35 is the name given to the UK’s off-payroll working rules. It is tax legislation designed to prevent “disguised employment”, where someone who would be an employee if they were hired directly instead works through an intermediary (usually a limited company, known as a personal service company or PSC) to pay less tax.

The name “IR35” comes from the original Inland Revenue press release that announced the rules back in 1999. The official name is the Intermediaries Legislation, but everyone calls it IR35.

In simple terms: if the way you work for a client looks more like employment than genuine self-employment, HMRC wants you taxed like an employee, even though you are technically working through your own company.

Important disclaimer

IR35 is a complex area of tax law. This guide covers the fundamentals to help you understand how it affects your invoicing and payment rights. It is not a substitute for specialist tax advice. If you are unsure about your IR35 status, speak to an accountant or IR35 specialist.

Inside IR35 vs outside IR35

Every contract you take on as a contractor falls into one of two categories:

Outside IR35

You are genuinely self-employed for this engagement
You invoice the full amount
You handle your own income tax and National Insurance through your company
You can take dividends from your company
This is the more tax-efficient position

Inside IR35

HMRC considers you a “disguised employee” for this engagement
You still invoice the gross amount
The fee-payer deducts income tax and employee NI before paying you
You are taxed similarly to an employee
You do not gain any employment rights

A single contractor can have some contracts outside IR35 and others inside IR35 at the same time. The determination is made per engagement, not per person.

Who decides your IR35 status?

This changed significantly in April 2021. The rules now depend on the size of the client:

Client size	Who decides
Medium or large (private sector)	The client makes the determination and issues a Status Determination Statement (SDS)
Public sector	The client makes the determination (this has been the case since April 2017)
Small (private sector)	The contractor still makes their own determination

A company is “small” under Companies Act 2006 if it meets two or more of these criteria: annual turnover not more than £10.2 million, balance sheet total not more than £5.1 million, not more than 50 employees.

When the client makes the determination, they must provide you with a Status Determination Statement (SDS) before you start work. This document states whether the engagement is inside or outside IR35 and gives the reasons. If you disagree, you have the right to challenge it through the client’s disagreement process.

The three tests: how IR35 status is assessed

Whether a contract falls inside or outside IR35 comes down to the nature of the working relationship. Courts have developed three main tests over the years:

1. Control

Does the client control what you do, how you do it, when you do it, and where you do it? The more control the client has, the more it looks like employment. A genuine contractor typically decides their own working methods and schedule, and is engaged to deliver a specific result rather than follow instructions.

2. Substitution

Could you send someone else to do the work in your place? If you have a genuine, unfettered right to send a substitute (and could do so without the client’s approval), this is a strong indicator that you are outside IR35. If the client expects you personally to do the work and would not accept a substitute, it looks more like employment.

3. Mutuality of obligation (MOO)

Is the client obliged to offer you work, and are you obliged to accept it? In employment, there is a mutual obligation: the employer provides work and the employee does it. A genuine contractor can turn down work, and the client is not obliged to keep offering it. If there is an ongoing obligation on both sides, it points towards employment.

No single test is decisive on its own. HMRC and the courts look at the overall picture, including factors like whether you provide your own equipment, whether you take financial risk, and whether you are integrated into the client’s organisation.

How IR35 affects your invoicing

The IR35 status of your engagement changes how you get paid, but in both cases you still raise an invoice from your PSC.

Outside IR35

You invoice the client for your full rate (plus VAT if registered)
The client pays the full invoice amount to your PSC
You decide how to take money from your company (salary, dividends, or a mix)
You handle all tax and NI through your self-assessment and company accounts

Inside IR35

You invoice the client for your full gross rate (plus VAT if registered)
The fee-payer (client or agency) calculates a “deemed payment”
They deduct income tax and employee NI from the deemed payment
They also pay employer NI on top (this comes from the gross fee, reducing what your PSC receives)
Your PSC receives the net amount after these deductions
The fee-payer must provide you with a payslip-style breakdown

The practical impact: on an inside IR35 contract, your take-home pay is significantly lower than on an equivalent outside IR35 contract. Many contractors negotiate a higher day rate on inside IR35 engagements to compensate for this.

Late payment rights and IR35

Here is the good news: your late payment rights under the Late Payment of Commercial Debts Act 1998 are not affected by your IR35 status.

Key points

Whether inside or outside IR35, your PSC’s invoice is a commercial debt between two businesses
The Late Payment Act applies to all B2B transactions, regardless of IR35 status
Your PSC can claim statutory interest and fixed compensation on late payments
Interest is calculated on the gross invoice amount, not the net amount after tax deductions
The fee-payer’s obligation to deduct tax does not change the payment terms on your invoice

If your invoice says “due in 30 days” and the client does not pay (or does not pay the correct net amount after deductions) within that period, your PSC can charge statutory interest from day 31 on the full gross amount.

One practical issue with inside IR35 contracts: some clients are slow to process the deemed payment calculation, which can delay payment. If the delay pushes payment past the due date on your invoice, you still have the right to charge interest.

The CEST tool

HMRC provides a free online tool called Check Employment Status for Tax (CEST) to help determine whether an engagement falls inside or outside IR35.

You answer a series of questions about the working arrangement, and CEST gives a determination. It is free, and HMRC says it will stand behind the result (as long as the answers were accurate).

However, CEST has been widely criticised:

It gives an “unable to determine” result in a significant number of cases
It does not properly account for mutuality of obligation, which is one of the three key tests
Some tribunal cases have reached different conclusions to CEST on the same facts
The questions can be ambiguous, and different interpretations lead to different results

CEST is a useful starting point, but it should not be your only source of information for borderline cases. If significant money is at stake, consider getting a formal IR35 contract review from a specialist.

How PennyFetch helps

PennyFetch tracks your invoices and chases late payments regardless of your IR35 status. Whether you are working on inside or outside IR35 contracts:

Invoice tracking: log your invoices with the gross amount. PennyFetch tracks the due date and flags when payments are late.
Automated reminders: polite, escalating reminders sent to your client when invoices go overdue.
Interest calculation: if an invoice goes significantly overdue, PennyFetch calculates the statutory interest on the gross invoice amount.
Letter Before Action: if reminders are not working, generate a formal LBA that references the Late Payment Act.

The goal is the same whether you are inside or outside IR35: make sure you get paid what you are owed, on time.

Frequently asked questions

Yes. Being inside IR35 does not stop you from operating through a PSC. It changes how you are taxed on that particular engagement. Your PSC still invoices the client, but the fee-payer (usually the client or an agency) must deduct income tax and employee National Insurance before paying your PSC. You can still have other engagements that are outside IR35.

Related guides

Late Payment Rights

Your statutory rights when clients pay late.

Payment Terms Guide

How to set terms that get you paid on time.

VAT Invoicing Guide

What to include on your VAT invoices.

CIS Invoicing Guide

Invoicing under the Construction Industry Scheme.

Letter Before Action Template

Free LBA template and step-by-step instructions.

Making Tax Digital

MTD requirements for contractors and freelancers.

This guide is for informational purposes only and does not constitute legal or tax advice. IR35 is a complex area and determinations depend on individual circumstances. Always seek specialist advice for your specific situation. See GOV.UK for official HMRC guidance.

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