Posted in PR and Communications,
Last updated: October 2026. Reviewed for the 2026/27 tax year.
IR35 doesn't apply to sole traders, but that doesn't mean sole traders, or the businesses that hire them, can ignore employment status. Different rules do a similar job, and who carries the risk depends on how the work is set up.
This guide explains which rules apply, who makes the status decision, and what independents and clients can do to get it right.
No. IR35 only applies where there is an intermediary, usually a limited company, between the independent and the client. A sole trader is legally the same person as their business, so there is no intermediary and IR35 doesn't come into it.
This is where the confusion often starts. Being a sole trader is not a way round IR35. It just means a different set of rules decides whether the person should be taxed as an employee.
If you work through your own limited company, read our guide to IR35 instead. It covers who decides, status determination statements and what happens if a role is inside IR35.
Which rules apply depends on how the sole trader is engaged.
Engaged directly by the client. If a business contracts directly with a sole trader, the general employment status rules apply. The business must decide whether the person is genuinely self employed or, in reality, an employee for tax purposes. If they are an employee in all but name, the business should be paying them through PAYE.
Engaged through an agency. If an agency contracts with the client and the sole trader contracts with the agency, HMRC's agency rules apply. Here the agency must decide whether to deduct tax. The test is narrower: the agency must operate PAYE if anyone has the right to supervise, direct or control how the sole trader does the work.
There's no small business exemption. Under IR35, small clients can leave the status decision to the independent's company. That exemption only exists within IR35. Whoever engages a sole trader, whatever their size, is responsible for getting status right.
Tax and employment rights are separate questions. Being self employed for tax doesn't automatically mean someone has no employment rights, and the reverse is also true. An employment tribunal can reach its own view on whether someone is an employee, a worker or self employed.
For a sole trader, the way the work is set up decides who makes the status decision and who pays if it turns out to be wrong.
|
How the sole trader is engaged |
Rules that apply |
Who decides status |
Who pays if status is wrong |
|
Directly by the client |
General employment status |
The client |
The client |
|
Through an agency |
Agency rules |
The agency |
The agency |
In both cases, unpaid tax usually comes with interest and possibly penalties, and the business can't recover employer National Insurance from the independent.
For how the risk falls when an independent works through a limited company or an umbrella company, see the table in our guide to IR35.
Sole traders don't receive a status determination statement, which is a formal part of IR35. But the business engaging them still needs to make a status decision and keep a record of it. HMRC and the courts look at the same broad factors as for IR35. No single factor decides it; the overall picture counts.
|
Factor |
Points towards self employment |
Points towards employment |
|
Control |
The independent decides how, when and where to do the work |
Someone can tell them how to work, set their hours or move them onto other tasks |
|
Substitution |
They have a genuine right to send someone else and pay them |
They must do the work personally |
|
Mutuality of obligation |
Work is defined by a project or deliverables, with no duty to offer or accept more |
An ongoing expectation of work, like a job |
|
Integration |
Treated as an outside supplier |
Manages staff, appears on staff lists, gets benefits or appraisals |
|
Financial risk |
Own equipment and insurance; fixes poor work at their own cost |
No financial risk; paid for time regardless of results |
|
In business |
Other clients, marketing, a track record as an independent |
Works for one client only over a long period |
Reality wins. If the contract says one thing but the day to day arrangement works differently, HMRC and the courts look at what actually happens.
Using CEST. HMRC's Check Employment Status for Tax (CEST) tool can be used by a client or an independent where a sole trader is engaged directly. It's free and anonymous and gives a printable result. HMRC says it will stand by the result if the answers are accurate and reflect how the work is really done. It isn't designed for agency engagements, where the agency rules apply.
CEST's limits. It doesn't fully consider every factor the courts look at, such as mutuality of obligation. It sometimes can't reach a result, and it doesn't cover employment rights. Use it as one piece of evidence alongside a written review of the factors above, and get specialist advice for borderline or senior roles.
We want independents and clients to be clear from the start about who is responsible for what.
We are not employment status specialists, so we work with Qdos, our partner. Qdos can review a role or contract and provide further specialist advice, for clients and independents. Find out more about Qdos.
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