The client’s size and sector decide who is responsible for IR35 status. A medium or large private client determines status itself and issues the paperwork. A small private client leaves the decision with the contractor’s limited company. The fee-payer in the chain, usually the agency, deducts the tax either way. HMRC holds whichever party determined or applied the wrong status answerable when the money falls short.
One engagement can involve 4 parties: the end client, the agency paying the contractor’s company, the personal service company (PSC) itself, and HMRC above them all. Each party holds distinct duties under the off-payroll working rules. This guide maps those duties: who determines status, who deducts the tax, and who answers to HMRC when a determination is wrong. Every duty below follows HMRC’s published guidance on GOV.UK, verified 19 September 2026.
Who Decides IR35 Status for Each Client Type?
The client’s size and sector determine who decides IR35 status. The off-payroll working rules recognise 3 client types, and each type assigns the decision differently.
What counts as a medium or large client?
A medium or large client meets 2 or more of 3 thresholds: £10.2m annual turnover, £5.1m balance sheet total, 50 employees. These clients determine IR35 status for every engagement and issue a Status Determination Statement (SDS) recording the conclusion and the reasons behind it. The client owns that determination from the day it is issued, including the tax risk attached to it.
What happens with a small client?
A small client meets fewer than 2 of those thresholds. Small private clients do not determine status. The worker’s intermediary, the contractor’s own limited company, decides whether the off-payroll rules apply to each engagement. The contractor then carries the IR35 liability for a small client engagement through the company. Small clients confirm their size in writing where a contractor asks.
How do groups and public bodies fit?
Public authorities determine status regardless of size. Private groups follow the parent company: where the parent meets the medium or large thresholds on group-wide figures, every subsidiary applies the rules. A client can move between categories as it grows, so each new engagement needs a fresh size check.
Directors who run their own company meet these duties from the first trading day. Our limited company formations service registers the company and builds the compliance calendar, covering annual accounts, Corporation Tax and PAYE, into the setup.
What Must the Client and Fee-Payer Do?
The client determines status and issues the SDS; the fee-payer deducts and pays the employment taxes. The two roles sit at different points in the chain, and each carries distinct client SDS obligations and fee-payer duties (GOV.UK, verified 19 September 2026).
Which duties sit with the client?
Medium and large clients hold 4 duties per engagement: determine the status, issue the SDS with reasons, operate a disagreement process, and pass the SDS down the supply chain unchanged. The SDS states the conclusion, inside or outside IR35, plus the reasons supporting it. An agency in the chain forwards the SDS to the next party without altering it. Where a contractor disputes the conclusion, the client considers the challenge and responds within 45 days.
Which duties sit with the fee-payer?
The fee-payer, the party paying the PSC, applies the off-payroll rules in payroll. The fee-payer deducts Income Tax and employee National Insurance from payments to the PSC, pays employer National Insurance and the Apprenticeship Levy where applicable, and reports each payment through payroll. Agencies of any size hold fee-payer duties where they pay the PSC, and an agency that meets the definition can become the deemed employer itself, carrying the employment taxes in full.
The table below sets out who does what at each link of a typical engagement chain.
| Chain role | IR35 duty |
|---|---|
| Client (medium or large) | Determines status, issues the SDS with reasons, runs the disagreement process |
| Fee-payer (agency or client paying the PSC) | Deducts Income Tax and employee National Insurance, pays employer National Insurance and the Apprenticeship Levy, reports through payroll |
| Contractor’s PSC | Invoices for the work, receives payment after deductions, keeps evidence of working practices |
Each role answers to HMRC for its own duty. A failure at one link does not cancel the duties at the links above or below it.
What Is the Contractor’s Own Responsibility?
The contractor holds 5 duties of their own, even where a large client has determined status. Contractors carry their own load under the rules (GOV.UK, verified 19 September 2026):
- Determine status themselves for small-client engagements, where the PSC decides whether the rules apply
- Check every SDS received against actual working practices, since the reasons recorded must match the day-to-day reality of the role
- Challenge wrong conclusions through the client’s disagreement process
- Record evidence of working practices, including contracts, schedules and communications
- Run the company’s own compliance, covering annual accounts, Corporation Tax and PAYE for any salary
HMRC’s Check Employment Status for Tax (CEST) tool produces a determination either side of an engagement can run. The output carries no legal weight; HMRC does not treat it as binding. Contractors use CEST as one input, never as the final word on status.
Our contractor accountants in Newcastle review SDS documents, prepare status evidence files and manage the annual compliance load for PSC directors across the North East.
Who Pays If IR35 Status Is Wrong?
The party that determined or applied the wrong status pays, and the client’s size fixes which party that is. Three cost scenarios follow an incorrect determination (GOV.UK, verified 19 September 2026).
What does a wrong outside determination cost?
A wrong outside determination on a medium or large engagement makes the client or fee-payer the debtor. The paying party owes backdated Income Tax, National Insurance, interest and penalties, the position that has applied since the private sector reform of April 2021. This exposure explains why medium and large clients run cautious compliance programmes rather than blanket inside determinations. A wrong outside determination on a small-client engagement leaves the tax debt with the PSC itself.
What does a wrong inside determination cost?
A wrong inside determination costs the contractor money, not the client. The overpaid tax is recoverable through Self Assessment once the correct status is settled with HMRC.
How does IR35 debt transfer work up the chain?
Where a fee-payer in the chain fails to deduct the tax due, HMRC can transfer the unpaid debt up the chain to the client above it. The IR35 debt transfer rules make the client answerable for its agencies’ compliance, not just its own. HMRC opens status enquiries years after engagements end, and complete records decide the outcomes. Our HMRC investigation support team defends contractors and clients through those enquiries, assembling the evidence file HMRC tests.
Common Questions Answered
These 4 questions cover the responsibility points contractors and clients raise most often.
Is the contractor ever responsible for their own IR35 status?
Yes, where the client is small and outside the public sector. A client below 2 of the 3 thresholds, £10.2m turnover, £5.1m balance sheet total and 50 employees, does not determine status, so the worker’s intermediary decides whether the rules apply (GOV.UK, verified 19 September 2026). The contractor then carries the tax risk if the determination is wrong. Small clients still confirm their size in writing where asked.
What does the client have to give the contractor?
A Status Determination Statement plus a disagreement process. The SDS records the conclusion and the reasons for it, and it passes down the chain from agency to agency unchanged (GOV.UK, verified 19 September 2026). The client also runs a process the contractor can use to challenge the conclusion, with a response due within 45 days.
Can HMRC move an IR35 debt from agency to client?
Yes. Where a fee-payer in the chain fails to deduct the tax due, HMRC can transfer the debt to the client above it (GOV.UK, verified 19 September 2026). The transfer rules explain why clients vet their agencies’ compliance, not just their own.
Does the client’s size matter for responsibility?
Decisively. Medium and large clients determine status and issue the SDS; small clients outside the public sector do not (GOV.UK, verified 19 September 2026). Groups follow the parent’s size on group-wide figures. A client moves between categories as it grows, so each engagement needs a fresh size check.
How Aqua Accounting Can Help
Aqua Accounting maps IR35 responsibility across every party in an engagement chain. We review SDS documents against actual working practices, prepare status evidence files, run annual accounts, Corporation Tax and PAYE for PSCs, and defend status enquiries as they arise. Aqua Accounting has spent 13+ years serving North East businesses as ICAEW Chartered Accountants and an ICAEW Registered Member Firm, with a UK-based team in Newcastle upon Tyne.
Know who determines your status, who deducts your tax and who answers to HMRC before the first invoice is raised. Book a consultation with our contractor team today.
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure accuracy, Aqua Accounting accepts no responsibility for any actions taken based on this content. You should seek professional advice tailored to your individual circumstances.
Omar Ahmed is an ICAEW Chartered Accountant and the Director of Aqua Accounting, a UK-based accountancy practice providing expert accounting and tax services to individuals, sole traders, and small to medium-sized businesses. As a trusted accountant in Newcastle, he offers expertise in annual accounts, self-assessment tax returns, company accounts, VAT, payroll, bookkeeping, and company formation.
With a strong focus on delivering clear and practical financial advice, Omar helps clients stay compliant while improving their understanding of their finances. Through Aqua Accounting, he works closely with business owners to simplify accounting processes, meet tax obligations, and support informed financial decision-making.