IR35 for tradespeople: when it applies (and how to stay outside it)

IR35 is HMRC’s name for the rules that stop people from dodging employment tax by working through their own limited company when they’re really just an employee in disguise. Most sole-trader tradespeople never touch it. But if you operate through a limited company and your work pattern looks like employment, it’s a problem.

Who does IR35 NOT apply to?

• Sole traders (no limited company = no IR35)
• Partnerships
• Tradespeople invoicing multiple customers
• Tradespeople who control their own work methods, hours and tools

If that’s you, stop reading. IR35 is not your problem.

Who IS at risk?

If you:

• Run your work through a limited company (a Personal Service Company, in HMRC-speak)
• Work mostly or entirely for one main contractor
• Have been at the same site for months or years
• Use their tools, site, schedule, supervision

…HMRC might look at you and decide you’re actually an employee of the main contractor, paid through a sham company structure. IR35 then applies — you pay tax as if you were an employee (PAYE + NI on most of your earnings) instead of drawing dividends from your company.

The three status tests

HMRC weighs three things when deciding if you’re inside or outside IR35:

1. Control. Who decides what you do, when you do it, and how? An employee is told; a genuine contractor decides.
2. Substitution. Can you send a qualified substitute if you’re ill? A genuine contractor can. An employee can’t.
3. Mutuality of obligation. Does the main contractor have to give you work? Do you have to take it? Employees yes; contractors no.

The more your contract and real working pattern look like an employee’s, the more likely IR35 applies.

If IR35 does apply to you

Since April 2021 for private-sector medium/large contractors, the contractor decides your status and handles the tax deduction. For small contractors, you decide and pay it yourself. Either way, an "inside IR35" classification means:

• Most of your income is taxed through PAYE-style deductions
• Your limited company becomes largely pointless for that contract
• You lose dividend-based tax efficiency

How to stay outside IR35

• Work for multiple customers. A plumber running jobs across 20 homes a month isn’t at risk.
• Have a real substitution clause. Not fake — actually used.
• Control your own work. Your tools, your schedule, your methods.
• Keep the contract on a job-by-job basis. Not "exclusive to this contractor for 12 months."
• Invoice by the job or project, not by the hour or day. Hourly rates start to look like employment.
• Don’t get integrated. No uniform, no email address, no inclusion in their org chart.

The honest answer for most tradespeople

If you’re a sole trader doing jobs for homeowners and the odd commercial gig — relax, you’re fine. IR35 is a limited-company problem. If you’re thinking about incorporating to save tax, factor IR35 exposure into the decision with your accountant.

For the tax-efficiency comparison itself, see our sole trader vs limited company guide.

Using the CEST tool — a walk-through

HMRC’s Check Employment Status for Tax (CEST) tool at gov.uk/cest produces a status determination you can reference if audited. It asks 15-20 questions across the three key areas:

Substitution questions

• "Does the contract allow the worker to send a substitute?"
• "Has the worker ever sent a substitute?"

If yes to either, strong outside-IR35 signal. If no, weak signal.

Control questions

• "Who decides how the work is done?"
• "Who decides where the work is done?"
• "Who decides when the work is done?"

For genuine contractors: you decide. For employees: the contractor decides. The tool weights these answers toward inside-IR35 if the contractor controls day-to-day work method.

Financial risk / mutuality

• "Does the worker have to put right any mistakes at their own expense?"
• "Can the contractor end the contract without notice if the work isn’t satisfactory?"
• "Does the worker provide their own equipment?"

Contractors typically fix their own mistakes (liability insurance), can be fired instantly (no employment protection), and bring their own tools. Employees don’t.

Status Determination Statement — what it contains

If you’re operating through a limited company and the main contractor is medium/large private sector or public sector, they must issue you a Status Determination Statement (SDS). Content required:

• Their determination (inside or outside IR35)
• Reasons for the determination, based on specific contract terms and working practices
• Delivered in writing to both you and the next party in the chain

You have a right to challenge via the contractor’s dispute resolution process within 45 days. If they uphold the determination you still disagree with, you can ask HMRC to rule but the burden of proof sits on you by that point.

A worked IR35 example

Electrician-turned-contractor working through their own limited company for one main contractor on a major new-build site:

• Contract length: 18 months (red flag: long duration)
• Works from 8am-5pm every day (red flag: controlled hours)
• Uses site tools provided (red flag: employer equipment)
• Reports to a site foreman, attends toolbox talks (red flag: integration)
• Has a no-substitution clause in their contract (red flag: personal service)

This person is almost certainly inside IR35 — working for one contractor, controlled hours, integrated, no substitution. The limited company saves them nothing because most of their income is taxed through deemed payroll.

Compare to a sole-trader plumber running jobs for 40 homeowners across the year: controls own hours, sends substitute occasionally, uses own van and tools, no integration. Not subject to IR35 at all (sole traders aren’t) and tax-efficiently structured.