Contractors: what to check if your client says you’re Outside IR35

If your client or agency has told you that your contract is outside IR35, that’s great news on the surface. But before you breathe a sigh of relief, there are certain things to check to ensure you are aware of your own obligations, if any. Mistakes are common, and if your client gets it wrong, you could be unknowingly exposed to risks. This guide will walk you through a practical outside IR35 check to ensure the decision is correct and has been made with reasonable care.

A label of “outside IR35” by the client or agency alone means nothing unless it is within scope of the Off-Payroll Working rules (Chapter 10, ITEPA 2003) and backed by a formal Status Determination Statement (SDS) issued by the correct party.

Let’s dive into 5 key checks all contractors being told their contract is “outside IR35” should be making.

1) Establish whether the Off-Payroll Working Rules apply at all

Not all clients are subject to the Off-Payroll Working (IR35) rules. The Off-Payroll rules only apply where the client is a UK public sector body or a medium/large private sector company.

If your client is a small private sector company or wholly overseas, the Off-Payroll rules don’t apply and the IR35 responsibility falls to you, the contractor, under the pre-existing IR35 rules (Chapter 8 ITEPA). In this situation, you should take steps to understand and document your IR35 position, and not take any “outside IR35” label from the client at face value.

If there are multiple parties in the contractual chain, it may not be clear which one is your “client” for IR35 purposes. See Step 2.

⚠️TIP: If a small company gives you an SDS, it has no legal effect, though it can be useful evidence in showing how they view the working relationship. You are still ultimately responsible for the IR35 decision, taking reasonable care, and liable for any tax and penalties if it’s wrong.

2) Identify who your “Client” is in the contractual chain

If you’re in a contractual chain involving consultancies, agencies or third-party suppliers, this can create confusion as to who the “client” is for IR35 purposes. It’s crucial to understand where the IR35 responsibility lies and whether the correct party has, or will be making the determination.

Before you sign any contract you have been told is “outside IR35”, you need to establish:

Who are the parties in the contractual chain, and which one is the initial beneficiary of your services, i.e. your “client” for IR35 purposes? This won’t always be the party your contract is with with.
Is that party a UK public sector or medium/large private sector company?
If yes to B, you will need an SDS from that party if you don’t already, and before you sign the contract and start the work.

⚠️TIP: If you’re working through a small consultancy that says the engagement is “outside IR35” because they’re delivering a genuine contracted-out service to a larger end client, this doesn’t automatically mean you’re outside IR35. It more likely means the Off-Payroll rules don’t apply – so the responsibility and risk sits with you, not the client.

On the other hand, if the consultancy is acting more like a body-shop or agency, the obligation to determine status may sit further up the chain with the end-client depending on their sector and size.

3) Ensure you have a Status Determination Statement, and that it is accurate.

If the engagement is within scope of the Off-Payroll Working rules, the client needs to provide you with an Status Determination Statement (SDS) formally confirming their IR35 decision and the reasons for it. Check it carefully.

Has the determination been undertaken by the correct party, and by an individual who has adequate oversight of your day-to-day work?
Does it provide sufficient reasoning for the outcome?
Does it accurately reflect how you will be working in practice?
Were you involved in the determination process?
Has your written contract been considered in the process?

If the SDS reasoning is clearly wrong – or based on assumptions you know don’t apply, this would warrant questioning. A determination of any outcome can be disputed – while it may seem nonsensical to dispute an outside IR35 decision, the client is required to take “reasonable care”, and doing so protects all parties in the chain, preventing potential headaches and liabilities later on.

You may be asked by your client or agency to formally “approve” the SDS. By approving it, be aware that you are accepting some responsibility for the accuracy of the determination.

⚠️ If the client used HMRC’s CEST tool, be cautious and confirm that they have read HMRC’s CEST guidance before answering the questions. CEST is very easy to get wrong, and HMRC will only stand by a CEST result if all inputs are correct and fully reflect the actual arrangements.

4) Does the written contract support the SDS?

Even if the SDS looks good, the written contract must support it and demonstrate an outside IR35 position – whether direct with the client or with an agency. Check:

Are the terms consistent with what the SDS says?
Do they accurately describe the scope of work, substitution rights, control, financial risk, and how the work is delivered?

If the contract doesn’t match the reality or contradicts the SDS, it should be amended so that everything aligns. Misaligned contracts are ammunition for HMRC to argue that the SDS was superficial or incorrect.

5) Watch out for Tax Indemnities in your contract

Most contracts we see contain some kind of indemnity that covers any tax or National Insurance that the client / agency may become liable to pay in relation to the contractor’s payments. These often go as far as including interest and penalties!

The key point is: under the Off-Payroll Working rules, these statutory liabilities legally rest with the fee-payer / client. Therefore, be cautious of clauses containing:

Tax indemnities – covering tax/NIC and any other costs in the event of a successful challenge of the determination at some point in the future.
Retrospective deductions – allowing the client to claw back tax/NIC if they later change their IR35 determination.
Obligations to notify changes – placing responsibility on you to inform the client if your working practices change.

If your contract contains indemnities, try to have them removed or reworded. At the very least, understand what you’re agreeing to. If the correct processes have been followed and the information in the SDS is correct, indemnities should not be necessary and are unjustified.

Why These Checks Matter for You

This might all look a bit much, and you may be wondering “Isn’t this just about protecting the client or agency?” The answer is no – these checks are just as important for protecting you, and by carrying out such checks, you are safeguarding your own position, not just at the start of the contract, but also in the event of a future IR35 audit involving your client.

So in summary, whether the client is large, small, or overseas, it’s essential to:

Confirm who holds the IR35 responsibility.
Ensure a correct and substantiated SDS has been issued (if applicable).
Establish and document your own IR35 status if your client is small or wholly overseas.
Align your contract with reality and challenge any terms that create unnecessary risks, especially indemnities.

Final Thoughts: “Outside IR35” doesn’t mean risk free

Being told you’re “Outside IR35” is a positive start, but don’t take that statement at face value. IR35 status is only as solid as the determination process, the supporting evidence, and how it aligns with your contractual and the reality of your working practices.

If you’re unsure, seek a professional review before signing. All of Bauer & Cottrell’s review services cover a detailed look at everything set out in this guide.

Browse our full range of services for contractors here.