I work with a lot of small agencies and freelancers who operate through personal service companies (PSCs), and one question comes up more than any other: “Will IR35 affect me — and if so, how do I deal with it without losing sleep or all my clients?” This is my practical, no-nonsense guide to IR35 aimed at people who want clear steps, real examples and paperwork tips they can action straight away.
What IR35 actually means for small agencies and freelancers
At its core, IR35 is a set of rules designed to determine whether a contractor working through a PSC is really an employee in all but name. If HMRC decides a contract falls “inside” IR35, the income must be treated like salary for tax and National Insurance purposes. That can significantly reduce take-home pay and change how you invoice and manage cashflow.
Since 2017 (public sector) and 2021 (private sector), the responsibility for deciding status shifted in many cases from the contractor to the end client — mainly for medium and large businesses. If you’re a freelancer dealing directly with smaller clients, you still need to be careful: status checks, contract wording, working practices and how the client operates can all be scrutinised.
How to quickly check your status
- Control: Do you choose your working hours and how the work is done, or does the client tell you exactly how, when and where to do it?
- Substitution: Could you send someone else to do the work instead of you? Being able to provide a genuine substitute is one of the strongest indicators of being outside IR35.
- Mutuality of obligation (MoO): Is the client obliged to offer work and obliged to pay you between assignments? Employment usually implies ongoing obligation; a contractor relationship is task-based.
- Financial risk: Do you bear any commercial risk — for example, are you responsible for fixing mistakes at your own cost, or do you provide equipment or materials?
- Part and parcel: Are you treated like a member of staff (e.g., included in staff meetings, staff benefits)?
Answering those questions honestly gives you a practical first indication. For formal status checks you can use HMRC’s Check Employment Status for Tax (CEST) tool — but be aware it isn’t infallible and has limitations when it comes to substitution and complex supply chains.
Practical steps to protect your PSC and your income
I advise treating IR35 as both a legal and a commercial issue. Here are steps I help clients take:
- Review contracts: Get a contract reviewed by someone who understands employment status tests. Generic freelance contracts often miss key clauses (genuine substitution, clear statement of deliverables rather than time-based services).
- Align working practices with the contract: If your contract says you can send a substitute, actually be able to do so. If you’re expected to work office hours and use the client’s tools, the contract should reflect that — but be aware those practices point towards inside IR35.
- Get a status determination statement (SDS) in writing: If you’re engaged through a medium or large client, they should provide an SDS. Keep records of it and any appeal/response communications.
- Document everything: Keep timesheets, emails about deliverables, emails showing you’ve organised subcontractors or suppliers, and invoices. These form the evidence base if HMRC ever asks.
- Consider contract length and structure: Shorter, clearly scoped assignments reduce ambiguity. Fixed-fee, output-based contracts are easier to argue as outside IR35 than open-ended day-rate deals.
What to do when a client says “you’re inside IR35”
It happens. Larger agencies sometimes decide status conservatively and shift the tax burden to you. Don’t panic; here’s a practical playbook:
- Ask for the assessment and rationale: Request the SDS and the evidence used to reach the decision. If they won’t provide it, push — you need it for your records and any appeal.
- Negotiate commercial terms: If the client insists on inside status, ask whether they will increase the contract rate or offer to cover the additional employer NIC liability. Many won’t, but some agencies will adjust rates to keep valued freelancers.
- Offer alternative engagement models: Suggest supplying via an umbrella company or offering services as a limited company on a clear project basis with defined deliverables.
- Escalate internally: Sometimes the decision comes from a procurement/compliance team rather than the hiring manager. A quick conversation with the hiring manager can clarify actual working practices and shift the decision.
Record-keeping checklist I recommend to clients
| Document | Why it matters | How long to keep |
|---|---|---|
| Signed contract | Primary evidence of agreed relationship | 6 years |
| Status Determination Statement (SDS) | Shows client’s position if engaged by medium/large firm | 6 years |
| Timesheets / delivery notes | Supports actual working practices | 6 years |
| Emails about substitution, scope, deliverables | Evidence of control and mutual expectations | 6 years |
| Invoices & payment receipts | Financial trail for tax and VAT | 6 years |
Insurance, accountants and tools worth using
Insurance: look at Professional Indemnity and, importantly, Tax Enquiry Insurance that covers IR35 or HMRC investigations. Providers like Qdos or Protectivity offer policies aimed at contractors.
Accountants: use an accountant experienced in contractor matters. I’ve seen contractors inadvertently trigger investigations by following poor advice from generalist firms. Ask potential accountants about experience with IR35 cases and whether they provide contract reviews as part of their service.
Tools: CEST is useful but not definitive. For keeping records and invoicing, use reliable software like Xero, QuickBooks or FreeAgent. They make it easy to attach contracts and timesheets to invoice records and produce evidence quickly if needed.
When to get legal help or challenge a decision
If a client’s decision threatens your income and negotiations stall, get a professional status review from a lawyer or specialist firm. Legal firms and consultancies can produce a status opinion that holds weight with clients and HMRC. If HMRC issues a discovery or assessment, seek tax dispute advice immediately — time limits and procedural rules are strict.
Finally, remember this is as much a business decision as a tax one. Sometimes the quickest, least stressful outcome is to walk away from a client whose working practices force you inside IR35 without reasonable compensation. Protecting your commercial position and cashflow is part of running a healthy freelance business.
