IR35 for Medium and Large Companies: A Practical Guide for UK Employers

A practical guide for UK HR and compliance teams

IR35 for medium and large companies refers to the UK off-payroll working rules that require organisations to assess whether contractors working through intermediaries should be treated as employed for tax purposes. In the private sector, this responsibility generally sits with the medium or large client receiving the contractor’s services. Public authorities are also covered by the client-led rules.

For Heads of HR and Compliance, IR35 affects much more than the wording of a contractor agreement. The organisation must understand how the work will be carried out, take reasonable care over its decision and issue a valid Status Determination Statement (SDS). If an engagement falls inside IR35, the correct party in the labour supply chain must operate PAYE, deduct employee National Insurance and pay employer National Insurance. A weak process can leave the client or another party with unpaid tax, interest, penalties and a large remediation exercise.

Each contractor engagement needs its own assessment, especially when the role or working arrangement changes. In this practical guide, you’ll learn how to assess contractor status, prepare a Status Determination Statement, confirm who handles tax and manage IR35 consistently across your organisation.

What is IR35 for medium and large companies?

Before looking at assessments and documentation, it helps to understand how the rules work and where each party sits in the contractor supply chain. This section explains how the off-payroll working rules work, which companies are covered and who is responsible for assessing contractor status.

What are the off-payroll working rules?

IR35 is the common name for the UK’s off-payroll working rules. They apply when a contractor provides services to a client through an intermediary, such as a personal service company (PSC), partnership or another individual.

The rules look at whether the contractor would be considered an employee for tax purposes if they worked directly for the client. If the answer is yes, the engagement is inside IR35. The contractor’s fees are then treated as employment income, with Income Tax and National Insurance handled through PAYE. If the working arrangement shows that the contractor is genuinely self-employed, the engagement is outside IR35.

IR35 does not ask whether a contractor has a limited company; it asks whether the working relationship would look like employment if the intermediary did not exist.

An inside-IR35 decision relates to tax status. It does not automatically give the contractor the same employment rights as an employee, such as holiday pay or protection from unfair dismissal. However, many of the same working practices are considered when reviewing both tax status and employment status. These include how much control the client has, whether the contractor must perform the work personally and how closely they work as part of the client’s team.

IR35 applies to each engagement separately. The same contractor could be inside IR35 for one client and outside IR35 for another. Companies should therefore assess the contract and actual working arrangement for every engagement.

Which businesses are classed as medium or large for IR35?

For most incorporated private-sector clients, the off-payroll responsibility moves to the client when it is medium or large under the statutory size test. For financial years beginning on or after 6 April 2025, a company is generally not small if it meets at least two of these conditions:

• annual turnover of more than £15 million
• a balance sheet total of more than £7.5 million
• more than 50 employees

Size can require more than a quick check of the latest accounts. The rules cover groups and connected companies, and changes in size normally work through a two-financial-year test. HMRC also uses a specified prior financial year when deciding which tax year is affected. The increased thresholds apply to financial years beginning on or after 6 April 2025, with transitional rules. HMRC says the earliest usual tax year affected by that transition is 2027/28.

A qualifying small private-sector client normally does not make the status determination under the client-led rules. Responsibility stays with the contractor’s intermediary under the original IR35 rules. The client may need to confirm its size when asked. Public authorities are covered by the off-payroll regime regardless of these private-sector size thresholds.

Agencies and other suppliers can still have important duties. The organisation paying the worker’s intermediary is commonly the fee-payer and may become the deemed employer for tax. Before setting an IR35 process, confirm the client’s size, group position and supply-chain structure for the relevant tax year.

Who is responsible for determining IR35 status?

For a medium or large private-sector organisation, the client receiving the worker’s services generally determines employment status for tax. The client must look at the individual engagement, take reasonable care and communicate its conclusion in a valid SDS.

The client gives the SDS to the worker and the party it contracts with. In an agency chain, the statement should be passed to the fee-payer. The client must also respond within 45 days when a worker or deemed employer challenges the decision.

The organisation that pays the worker’s intermediary is usually the fee-payer. Once the SDS and chain conditions have been met, that organisation is normally treated as the deemed employer when the engagement is inside IR35. It operates PAYE and deals with the required National Insurance and Apprenticeship Levy.

If the client fails to take reasonable care, its SDS is not valid and the client can become responsible for tax. A party that does not pass the SDS on before payment can also retain responsibility. Liability may move up the chain if HMRC cannot collect it from the party that should have paid.

These roles should be recorded in contracts and operating procedures. The client cannot safely assume an agency has taken over its assessment duty simply because the agency manages onboarding or payment.

How should medium and large companies assess IR35 status?

Medium and large companies should assess each contractor engagement using the written contract and the way the work will be carried out in practice. A consistent process helps teams gather the right information, apply the same status factors and document how each decision was reached. The sections below explain what to review, how to use HMRC’s CEST tool and what reasonable care looks like in practice.

What factors determine whether a contractor is inside or outside IR35?

No single factor decides whether a contractor is inside or outside IR35. The organisation must consider the contract and the real working arrangement as a whole. Courts weigh the relevant facts, and their significance can vary with the type of work.

Common IR35 status factors include:

• Personal service and substitution: Is the named person expected to do the work, or can the business send a suitably qualified substitute? A substitution clause carries little weight if it cannot genuinely be used or the client has an unrestricted right to refuse.
• Control: Who decides what work is done and how, when and where it is completed? A client can specify outcomes, deadlines and security requirements without controlling every part of the work, but close day-to-day direction can point towards employment.
• Mutuality of obligation: Must the client keep offering work, and must the worker accept it? A project with a defined deliverable can look different from an ongoing arrangement in which work is continually allocated.
• Financial risk: Does the contractor quote for work, correct defects at their own cost, carry insurance or risk making a loss? Payment simply for time worked with little business risk may point the other way.
• Equipment: Does the contractor supply equipment that a business providing this service would normally supply? Client equipment required for security or site access is not conclusive on its own.
• Integration: Is the contractor managed, presented and included like an employee, or do they remain an external supplier? Employee reporting lines, appraisals and internal responsibilities can be relevant.
• Other clients and exclusivity: A genuine business may serve several clients, although having one client during a project is not decisive.
• Benefits and business structure: Employee benefits, paid leave or staff perks may suggest employment. Business premises, insurance, helpers and responsibility for delivery may support self-employment.

The contract should match what happens in practice. Outside-IR35 wording will not protect the organisation if a manager controls the worker like an employee or prevents genuine substitution. One employee-like feature is not conclusive. Record the facts, weigh them together and explain the conclusion.

How should companies use CEST and avoid blanket determinations?

HMRC’s Check Employment Status for Tax (CEST) tool helps companies check whether a contractor is employed or self-employed for tax purposes. It asks about the contract, the work the contractor will do, who controls the work and how the contractor will be paid.

The answers need to match the actual working arrangement. Before completing the check, HR or Compliance should speak with the hiring manager and review the contract. A job description alone may not show how the contractor will work day to day.

HMRC says it would stand by the result if the information provided is accurate and follows its guidance. Keep a copy of the questions, answers, result and any documents used during the assessment.

The CEST result can also be used as a Status Determination Statement if it states the decision and reasons, and the company has taken reasonable care. CEST may not give an answer in every case. When this happens, review the information and get specialist advice if the contractor’s status is still uncertain.

Each contractor engagement should be assessed separately. Companies should avoid placing every contractor inside or outside IR35 without checking their individual contract and working arrangement.

The same assessment process can be used across similar roles, but any differences still need to be considered. A shared process and trained reviewers can help teams make more consistent decisions across the business.

What does reasonable care mean in an IR35 assessment?

Reasonable care means making a careful, informed status decision using accurate facts and a process suitable for the organisation’s size and contractor population. It is not enough to copy a previous result, accept a supplier’s view without checking it or issue an SDS with no reasons.

Reasonable care checklist 

• Confirm the contractor’s role, deliverables, duration and scope.
• Review the full contractual chain, including the contract with the PSC.
• Speak with the hiring manager about actual working practices.
• Assess personal service, substitution, control, mutuality of obligation, financial risk and the other relevant indicators.
• Record the evidence, any CEST answers and the reason for the conclusion.
• Arrange an independent or appropriately senior review for difficult cases.
• Issue an SDS with reasons to the required parties.
• Give the worker and deemed employer a route to challenge the decision.
• Review the assessment when the engagement changes.

Good governance usually involves HR, Compliance, Procurement, Finance, Legal and operational managers, but their roles should be defined. For example, Procurement may control supplier terms, HR may own the methodology, hiring managers may confirm working practices and Payroll or Finance may check that the correct party operates PAYE.

What happens when a contractor is inside IR35?

What is a Status Determination Statement?

A Status Determination Statement (SDS) is the client’s written conclusion that a worker is employed or self-employed for tax purposes for a specific engagement. It means recording whether the engagement is inside or outside IR35.

A valid SDS must state the decision, give reasons based on the relevant employment-status indicators and follow an assessment in which the client took reasonable care. HMRC accepts an accurate CEST output as an example of a valid SDS, although supporting context can make the decision easier to understand.

An SDS record should normally include:

• contractor, client and engagement details
• the inside or outside IR35 decision
• key contractual and working-practice facts
• factors considered and reasons for the conclusion
• evidence sources, including any CEST output
• decision date and reviewer or approver
• how to raise a disagreement
• a review trigger or date

The client must give the statement to the worker and the party it contracts with. Each agency in a longer chain should pass it to the next qualifying party so that it reaches the fee-payer. Distribution should happen before the relevant payment because a party can retain deemed-employer responsibility until it passes the statement on.

The worker or deemed employer can disagree with the result. The client must consider the representations and respond within 45 days, either confirming the original decision with reasons or issuing a new SDS. A well-supported statement makes that discussion easier and provides an audit trail if HMRC later checks the engagement.

Who pays PAYE and National Insurance if IR35 applies?

If an engagement is inside IR35, the deemed employer must treat the payment for the worker’s services as employment income for tax purposes. The deemed employer is usually the agency or other organisation that pays the worker’s intermediary. Where there is no agency in the chain, the client may be the deemed employer.

The payment is handled as follows:

• PAYE Income Tax: deducted from the amount treated as earnings.
• Employee National Insurance: deducted from the deemed direct payment where due.
• Employer National Insurance: paid by the deemed employer in addition to the payment.
• Apprenticeship Levy: paid where the deemed employer is liable for the levy.

VAT is dealt with separately and legitimate direct costs of materials may be excluded when calculating the deemed direct payment. The deemed employer reports the payment through payroll using the off-payroll worker indicator. It should not deduct student or postgraduate loan repayments for a worker engaged through their own company. The worker accounts for those obligations through their own tax return.

An inside-IR35 contractor is treated as an employee for tax on this payment, but this does not make the deemed employer their employer for employment-rights or pension auto-enrolment purposes. This distinction should be explained to managers and contractors to avoid incorrect promises about benefits or rights.

Contracts with agencies and payroll providers should state who pays the PSC, who will operate PAYE and what information must be passed through the chain. The client should test the process rather than assume the word “fee-payer” in a contract settles liability.

What are the consequences of getting IR35 wrong?

Getting IR35 wrong can create tax exposure, compliance work and disruption across the contractor workforce. The financial risk may include PAYE Income Tax, employee and employer National Insurance, Apprenticeship Levy, interest and penalties.

The exact liability rests on the facts and on which party failed to meet its duty. A client that does not take reasonable care can become the deemed employer. A supply-chain party may retain responsibility if it does not pass on the SDS. HMRC can also use debt-transfer provisions in some circumstances when tax cannot be collected from the party that should have paid it.

Since 6 April 2024, HMRC can take account of certain Income Tax and Corporation Tax already paid by the worker or their intermediary when settling an off-payroll PAYE error for payments made from that date. This can reduce double taxation, but it does not remove the underlying failure. Employer National Insurance, interest, possible penalties and the cost of correcting records can still remain.

The operational work can be substantial. Teams may need to find historic contracts, reconstruct working practices, correct payroll reporting, review suppliers and communicate with affected contractors. A disputed determination can delay onboarding or renewal. Inconsistent decisions across departments can also weaken trust, especially when similar roles receive different outcomes without a recorded reason.

The cost of getting IR35 wrong is not limited to tax liability; it can also create contractor disputes, supplier disruption and significant administrative burden.

The strongest protection is a documented process applied consistently to each engagement. That includes accurate assessments, valid SDS records, a 45-day disagreement process, clear fee-payer responsibilities and reviews when the work changes.

How CXC helps medium and large companies manage IR35 compliance

Navigating off-payroll working rules requires a structured approach that protects your business without creating operational friction. CXC provides tools, expertise, and operational frameworks medium and large companies need to manage contractor engagements safely and efficiently at scale.

CXC helps assess contractor status before engagement

CXC helps organisations review contractor status before a worker starts, while the role, contract, and operating model can still be adjusted. This prevents informal hiring decisions from turning into unmanaged tax risks after onboarding.

To support compliance for medium and large companies, CXC’s pre-engagement reviews examine both the contract terms and practical working arrangements. This includes evaluating key IR35 factors such as personal service, substitution rights, direction and control, mutuality of obligation, financial risk, and organisational integration.

CXC provides a structured assessment workflow that gathers details directly from the managers who understand the role, documenting the clear rationale behind every Status Determination Statement (SDS). By establishing clear review and approval points, CXC gives HR, Compliance, Legal, Procurement, and Finance a single, consistent process to follow across the business.

CXC supports compliant contractor management and workforce governance

IR35 compliance requires far more than one-off assessments; it demands ongoing contractor management across the entire worker lifecycle. CXC supports every stage of this journey, ensuring assessments, documentation, payments, and periodic reviews follow a single, controlled process that demonstrates reasonable care to HMRC.

Through CXC Comply, organisations can standardise worker classification, run background compliance checks, and automate approval workflows. The platform centralises every Status Determination Statement (SDS) and audit trail, making records instantly available for legal review. To handle day-to-day operations, Contractor Management Outsourcing adds structured onboarding, contractor care, payment administration, reporting, and complete visibility across your contingent population.

To match specific engagement scenarios, CXC provides flexible workforce models:

• Agent of Record: Manages contracts and payments when a worker is outside IR35 and genuinely operating as an independent business.
• Employer of Record: Takes on legal employment responsibilities when an engagement falls inside IR35, ensuring workers receive compliant employment structures.
• Global Payroll: Handles accurate PAYE tax and National Insurance deductions whenever a payroll-led route is required.

By uniting internal governance across Hiring Managers, HR, Procurement, Finance, and Legal, CXC establishes a unified standard for off-payroll working. The result is stronger overall workforce governance, fewer unmanaged compliance exceptions, and a consistent, frictionless experience for every contractor you engage.

When to speak to CXC about IR35 compliance

As an employer, you should start seeking support when growing contractor numbers make your process hard to manage. Getting help ensures every worker is correctly assessed and documented.

Practical signs include:

• contractor numbers are growing across departments or locations
• similar roles receive different determinations without a recorded reason
• hiring managers make informal inside or outside IR35 decisions
• the organisation lacks a standard SDS and 45-day disagreement process
• contractors are engaged through several agencies or suppliers
• no team has confirmed the deemed employer and PAYE responsibility
• blanket determinations are being used to save time
• an HMRC check, supplier review, transformation or programme redesign is expected

A review can map the current contractor population, supply chains and ownership before a dispute or compliance check exposes gaps. It can also identify where independent contracting remains appropriate, where working practices need attention and where employment is the better route.

If your organisation is reviewing IR35 for medium and large companies, speak to our team to assess contractor engagement models, strengthen governance and build a more consistent compliance process.

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