IR35 Changes: What UK Businesses Need To Know When Hiring Contractors

If you hire contractors (or you’re about to bring your first one on board), IR35 can feel like one of those “big business” tax issues that shouldn’t land on your desk.

But in practice, the recent IR35 changes to the off-payroll working rules mean many small and growing businesses now have real compliance steps to follow - and if you get them wrong, the cost can fall on your business.

Don’t stress. Once you understand what the rules are trying to do, it becomes much easier to put a practical process in place that protects you from day one.

This guide explains what the IR35 changes mean for UK businesses hiring contractors, what you need to do in practice, and how to reduce risk with the right contracts and processes.

Important: Sprintlaw can help with contracts, working arrangements and managing legal risk - but we don’t provide tax advice or make IR35 tax determinations. For a tax status decision or PAYE/NIC calculations, you should speak to a qualified tax adviser (and/or use HMRC guidance/tools) alongside legal advice.

What Are The IR35 Changes (And Why Do They Matter To Your Business)?

IR35 is shorthand for the UK’s rules targeting “disguised employment”. This is where someone works like an employee, but they’re paid as though they’re self-employed (often through a personal service company (PSC) or other intermediary).

When people talk about “IR35 changes”, they’re usually referring to the shift in responsibility for determining employment status for tax purposes in many situations:

• Historically, the contractor (or their intermediary/PSC) decided whether IR35 applied.
• Under the off-payroll working reforms, in many private sector engagements, the client (your business) must decide whether IR35 applies.

That’s the key point for small businesses: depending on your size and how you engage the contractor, you may be responsible for deciding whether a contractor is genuinely “off-payroll” (outside IR35) or effectively an employee for tax purposes (inside IR35).

If you’re responsible for the decision and get it wrong, the risk can include:

• unpaid PAYE income tax and National Insurance contributions (NICs)
• interest and penalties from HMRC
• disruption to key projects if contractors walk away due to uncertainty
• knock-on legal issues if the relationship starts looking like employment in other ways (not just tax)

Even where you’re not directly responsible (for example, because you qualify as a “small” client), IR35 is still relevant because it impacts how contractors price work, how they want contracts drafted, and how you should manage working arrangements.

Does IR35 Apply To Your Business? (Small Company vs Medium/Large Company)

A common misunderstanding is: “We’re a small business, so IR35 doesn’t apply to us.”

The more accurate version is:

If you’re a “small” client, the contractor/intermediary usually remains responsible for assessing IR35. If you’re not small, then the responsibility generally shifts to you (the end client) to make the status determination.

How Do You Know If You’re “Small” For IR35?

For many engagements, the “small company” assessment aligns with Companies Act size thresholds. In plain terms, a company will generally be “small” if it meets two out of three criteria (based on its most recent accounts):

• annual turnover of £10.2 million or less
• balance sheet total of £5.1 million or less
• average number of employees of 50 or fewer

There are also rules for groups (where connected/parent companies can affect the analysis) and separate considerations for unincorporated clients (sole traders/partnerships), which generally look at turnover against the relevant threshold.

Because “small” status can change as you grow - and because group structures, connected entities and edge cases (including some overseas/client scenarios) can complicate things - it’s worth getting advice if you’re near the thresholds or scaling quickly.

Why This “Small Client” Point Still Matters Even If You’re Exempt

Even if you’re a small client and the contractor remains responsible, you should still treat IR35 as a practical risk area. For example:

• contractors may ask you questions about working practices so they can complete their own status assessment
• your contract terms and day-to-day management can unintentionally create “employment-like” features
• your agency supply chain may impose IR35-related obligations on you anyway

This is why it’s smart to align both the paperwork and the reality on the ground. A well-drafted Contractors Agreement can make a big difference, but only if it matches how the engagement actually operates.

What Do You Actually Need To Do Under The Off-Payroll Working Rules?

If the off-payroll working rules apply to your business (i.e. you’re not a small client and you’re engaging contractors through intermediaries such as PSCs), you’ll generally need a process that covers:

1) Make A Status Determination (Inside Or Outside IR35)

You need to decide whether the contractor would be an employee if they were engaged directly (rather than via a PSC).

This is not just about what your contract says. HMRC will look at the real relationship, including:

• Control: who decides what work is done, how it’s done, and when/where it’s done?
• Substitution: can the contractor send a genuine substitute, and is that right likely to be used?
• Mutuality of obligation: are you obliged to offer work and are they obliged to accept it (beyond the specific project)?
• Integration: do they look/feel like part of your internal team (email address, org chart, line management, appraisals)?
• Financial risk and business-on-own-account factors: do they provide equipment, carry risk, fix defects on their own time, market themselves to others?

If you want a plain-English framework for the broader “employee vs worker vs self-employed” question (which often overlaps with how you structure contractor engagements), the Employment Status Tests are a helpful starting point.

2) Provide A Status Determination Statement (SDS)

Where required, you must provide a written Status Determination Statement to:

• the individual contractor, and
• any relevant party you contract with in the labour supply chain (e.g. an agency)

The SDS should clearly state your conclusion (inside or outside IR35) and the reasons for it.

3) Take “Reasonable Care”

HMRC expects you to take reasonable care when making the determination. In practice, that means you should be able to show you:

• gathered relevant facts about the role and working practices
• applied a sensible assessment method consistently
• kept records of how you reached your decision

“Reasonable care” isn’t about perfection - it’s about having a defensible, documented process rather than guessing (or defaulting everyone to the same answer).

4) Run A Disagreement Process

Contractors can disagree with an SDS. Where the rules apply to you, you need a process to handle challenges and respond within the required timeframes.

From an operational perspective, it’s best to plan for this upfront. If you leave it until a key contractor disputes your determination mid-project, you can end up with delays, re-pricing, or the engagement falling apart.

5) Put The Right Tax/NIC Arrangements In Place (If Inside IR35)

If the engagement is inside IR35, the “fee-payer” (the party that pays the contractor’s intermediary, such as the PSC) will generally need to operate PAYE and deduct tax/NICs.

In some structures, that fee-payer will be an agency; in others, it may be your business (for example, if you pay the PSC directly). Because liability can move depending on the supply chain and what each party has actually done, it’s important to confirm - in writing - who the fee-payer is and what payroll/tax steps they will take.

This can affect:

• how you budget for the contractor
• your contracts with agencies and intermediaries
• invoice and payment processes

It’s also worth noting that there have been updates aimed at making the system fairer where HMRC pursues PAYE - for example, where tax has already been paid elsewhere in the chain. The detail matters, so it’s worth getting tailored tax advice if you’re dealing with an enquiry or historic risk.

Common IR35 Risk Triggers When You Hire Contractors (And How To Avoid Them)

Most IR35 problems don’t start with bad intentions. They usually start with a contractor engagement that slowly becomes “employee-like” because it’s convenient.

Here are common triggers we see - and practical ways to reduce your risk.

Contract Says “Contractor”, But You Manage Them Like Staff

If your contractor is:

• managed day-to-day like an employee
• required to work set hours without flexibility
• embedded in your internal org structure
• given internal titles and responsibilities beyond a defined project

…that can undermine an “outside IR35” position.

What to do: keep the engagement project-based where possible, focus on deliverables, and avoid line-management style control. Make sure the written terms support this approach and are aligned with UK contract law basics (clear scope, payment terms, termination rights, and risk allocation).

No Genuine Substitution Right (Or A “Fake” One)

A genuine substitution clause can support an outside IR35 position, but only if it’s realistic.

What to do: if substitution is part of your model, make sure the contract reflects a genuine ability to provide a suitably qualified substitute (with sensible conditions like security checks, competence, and confidentiality).

Rolling “Open-Ended” Engagements With No Clear End Point

Long engagements aren’t automatically inside IR35, but a never-ending rolling arrangement can start to look like ongoing employment.

What to do: document milestones, review points, and defined scopes of work. If you need long-term support, consider whether a different engagement model fits better.

Unclear Liability And Risk Allocation

If your contracts don’t clearly allocate risk, you can end up wearing liabilities you didn’t expect - and disputes can quickly get expensive.

What to do: use well-drafted limitation and risk clauses that suit your project and bargaining position, including Limitation of Liability provisions where appropriate.

What Legal Documents Should You Have In Place When Hiring Contractors?

When it comes to IR35, your contract isn’t the whole story - but it’s still one of your best tools for setting expectations and protecting your business.

At a minimum, you should consider:

A Contractor Agreement Tailored To The Engagement

A proper contractor agreement should cover things like:

• scope of services and deliverables
• fees, invoicing, and expenses
• who supplies equipment and tools
• IP ownership and assignment (so you actually own what you pay for)
• confidentiality obligations
• data protection responsibilities (where relevant)
• termination rights and handover requirements
• subcontracting/substitution rules

If you’re unsure what you need for your specific engagement (especially if it’s business-critical or high value), a Contractor Agreement Consult can be a smart first step to make sure your documents match your commercial reality.

Clear IP And Confidentiality Protections

Many small businesses hire contractors for development, design, marketing, or specialist operational work. If your agreement doesn’t clearly deal with IP, you may not automatically own the deliverables.

That can become a major issue later - for example, if you try to sell your business or raise investment and can’t prove you own your core assets.

Data Protection Terms Where The Contractor Handles Personal Data

If your contractor accesses customer lists, employee records, or user analytics, you need to think about UK GDPR and the Data Protection Act 2018.

Depending on the arrangement, you may need a Data Processing Schedule (or similar data processing terms) to set out what the contractor can do with personal data, security requirements, breach reporting, and deletion/return obligations.

Agency / Supply Chain Protections (If You Hire Through An Agency)

If you engage contractors through an agency, the contracts between:

• you and the agency, and
• the agency and the contractor/PSC

can determine who bears key IR35-related risks and responsibilities.

This is one of the most common areas where small businesses get caught out - not because they did anything wrong, but because they sign standard agency terms without negotiating liability and compliance points.

If you’re not sure where you stand, getting a Contract Review before you sign can save you a lot of stress later.

Key Takeaways

• The IR35 changes mean many UK businesses hiring contractors now have responsibilities under the off-payroll working rules, especially if the contractor operates through a PSC or other intermediary.
• Whether your business is “small” matters, because it can affect who is responsible for the IR35 status assessment - but IR35 still affects contract terms, pricing, and risk either way.
• If the rules apply to you, you’ll need a practical process for making and documenting status determinations, issuing an SDS, taking reasonable care, and handling disputes.
• Working practices matter just as much as written terms - managing a contractor like an employee can undermine an “outside IR35” position even if your contract says otherwise.
• A well-drafted contractor agreement, plus clear IP, confidentiality, and (where needed) data protection terms, helps you reduce disputes and protect your business from day one.
• If you hire through agencies, check the supply chain contracts carefully so you understand where IR35 liability and compliance obligations sit.

If you’d like help reviewing your contractor arrangements, putting the right agreements in place, or sense-checking your IR35 legal risk areas, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.