Does IR35 apply to sole traders?

IR35 was introduced to clamp down on workers who set up limited companies as a way to minimise their exposure to income tax and National Insurance liabilities, despite their working practices being more akin to that of ’employees’.

As the name suggests, the legislation targeted the use of personal service companies – the ‘intermediaries’ – in the relationship between contractor, agency and end client.

Sole Traders and IR35

For obvious reasons, almost all discussion of IR35 matters has revolved around the use of limited companies (as umbrella company contractors are not affected).

But what about sole traders?

We asked Seb Maley from Qdos whether or not IR35 was a consideration for sole traders.

The specific legislation only applies to limited companies (and partnerships). However, status is also an issue for sole traders. The main difference is that the end client would foot the bill if they were deemed to be disguised employees, rather than the contractor himself.

An intermediary company is interposed between the relationship between worker and end client and therefore the contractor’s limited company becomes the employer. A sole trader works directly for the end client rather than for their own company and therefore the end client is at risk of being deemed the employer.

Contracting as a sole trader

This once again illustrates the point of why contractors rarely operate as sole traders, something we have covered in previous articles on Contract Eye.

Under the terms of the Income Tax (Earnings and Pensions) Act 2003, a recruitment agency must treat a sole trader contractor as an employee.

This means that the agency needs to deduct income tax and NICs at source, and any settle any other liabilities which could arise as a result of employing the sole trader.

This is why agents only work with limited company or umbrella company contractors – where an intermediary exists between the contractor and agency.

Some clients may be happy to hire sole traders directly.

However, depending on the true nature of the relationship between sole trader and client, the client may be deemed to be the ’employer’ according to HMRC’s employment status rules.

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Last updated: 12th August 2023