Private sector contractors working for a small company can sometimes sidestep IR35 status determinations entirely. Contracting for the public sector, however small the specific department or trust, has never worked that way.
Why public sector engagements are different
Off-payroll working rules were extended to the public sector first, in April 2017 — four years before the equivalent 2021 reform reached medium and large private sector businesses. Crucially, the "small client" exemption that lets some private sector contractors retain control of their own IR35 determination has never applied to the public sector at all. Every public authority engaging a contractor through a personal service company, regardless of its own size, is responsible for determining that contractor's status.
What the client must actually produce
The engaging public body must issue a Status Determination Statement (SDS) setting out whether the engagement falls inside or outside IR35, and the reasons for that conclusion, while exercising "reasonable care" in reaching it. If the engagement is determined to be inside IR35, the deemed employer becomes responsible for operating PAYE and National Insurance on the payments — this is what produces the commonly cited take-home pay reduction, since tax is deducted at source as if the contractor were an employee, without the accompanying employment rights.
The three tests that actually drive the outcome
- Control: does the client control what work is done, when, where, and how? Higher control suggests inside IR35.
- Substitution: could you send someone else to do the work instead of you personally? A genuine, exercised right of substitution — not just an unused clause in the contract — is one of the strongest indicators of outside-IR35 status.
- Mutuality of obligation: is the client obliged to offer ongoing work, and are you obliged to accept it? Mutual ongoing obligation suggests inside IR35; a genuine, defined, project-based engagement suggests otherwise.
CEST: useful, but not the final word
HMRC's Check Employment Status for Tax (CEST) tool is free and commonly used to support an SDS — if answers accurately reflect the actual working arrangement, HMRC will generally stand by the result. But CEST doesn't always reach a determination (it can return "unable to determine" in a meaningful share of cases), and it's been widely criticised for giving limited weight to mutuality of obligation specifically. A CEST result should reflect your actual working practices, not an optimistic description of them — outcomes based on inaccurate inputs have been overturned at tribunal.
How to build a genuine outside-IR35 case
- Document instances where you've actually exercised a right of substitution, not just a theoretical clause allowing it.
- Keep evidence of financial risk you carry — costs you'd bear for correcting your own mistakes, your own equipment or tools, or working for multiple clients concurrently.
- Ensure your contract and your actual day-to-day working pattern match — HMRC assesses the reality of the relationship, not just what the paperwork says.
- If working practices genuinely support an outside-IR35 position, request the client run CEST with those honest details and provide the resulting SDS in writing.
- If you disagree with an SDS, use the client's mandatory status disagreement process — public sector engagers are required to have one.
What this means practically
- There is no size-based exemption for public sector engagers — every public body must determine contractor IR35 status, unlike some private sector clients.
- A genuine, exercised substitution right and real financial risk are the strongest practical evidence for an outside-IR35 position.
- CEST results are only as reliable as the honesty and accuracy of what's entered — misleading inputs create real risk if HMRC later reviews the engagement.
- If you disagree with a status determination, use the client's formal disagreement process rather than simply accepting or walking away from the engagement.
Sources
- Integro Accounting — Understanding CEST: HMRC's employment status tool for IR35: integroaccounting.com
- IR35 Update — CEST explained: when HMRC's IR35 tool works, and when it doesn't: ir35update.co.uk
Related Kibbo Tools
- Administrative Appeal Checklist — general principles for challenging a formal determination apply to disputing an SDS as well.