Getting employment status wrong is one of the most expensive mistakes a business can make. HMRC has successfully recovered hundreds of millions of pounds from businesses that incorrectly treated workers as self-employed freelancers when they were actually employees or workers in law.
The consequences of getting it wrong:
IR35 applies to contractors who work through their own limited company (Personal Service Company or PSC). Since April 2021, medium and large businesses are responsible for determining whether contractors are inside or outside IR35 — not the contractor. From April 2026, the rules were updated to include joint liability between umbrella companies, agencies, and end clients.
| IR35 status | Tax treatment | Implication |
|---|---|---|
| Outside IR35 | Contractor pays own tax through their company | Lower tax burden — tax efficiency maintained |
| Inside IR35 | Deemed employment — tax deducted at source as if employed | Contractor receives equivalent of employee net pay |
Medium and large businesses must provide a Status Determination Statement to every contractor before engagement begins. The SDS must state inside or outside IR35 and give reasons. The contractor can disagree and the business must respond within 45 days. Keep all SDS records — they are your evidence in any HMRC dispute.
DocPilot Freelancer Agreement and Comprehensive Freelancer Contract — both drafted to reflect outside-IR35 indicators wherever legally appropriate. Updated for April 2026 IR35 changes.
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