If you’re a self-employed professional, freelancer, or contractor in the UK, you’ve likely heard about IR35 and the confusion it brings. Many wonder whether IR35 applies to sole traders and what it means for their tax responsibilities. The truth is, while IR35 can cause headaches for limited company contractors, sole traders stand outside its scope entirely.
However, that doesn’t mean you’re completely off the radar when it comes to HMRC scrutiny. Employment status and agency legislation still play a crucial role in determining how you’re taxed, and getting it wrong could be costly for both you and your clients.
In this guide, we’ll break down everything you need to know about IR35 and sole traders, how the rules differ, and what steps you can take to stay compliant, confident, and in control of your business.
What Is IR35?
IR35, officially known as the off-payroll working rules, is tax legislation introduced by HMRC in 2000 to prevent tax avoidance through disguised employment. This occurs when individuals supply services to clients through an intermediary, such as a limited company or umbrella company, but work in a way that resembles employment rather than genuine self-employment.
Under IR35, HMRC assesses whether a worker is a genuine contractor or effectively an employee for tax purposes. The key tests used to determine this include:
- Control: Who decides how, when, and where the work is done?
- Substitution: Can the worker send someone else to complete the work?
- Mutuality of Obligation: Is the client obliged to offer continuous work, and is the worker obliged to accept it?
If a contract is deemed inside IR35, the worker is treated as an employee for tax purposes, and Income Tax and National Insurance Contributions (NICs) are deducted at source through PAYE.
If the engagement is outside IR35, the contractor is considered genuinely self-employed and is responsible for managing their own tax affairs.
What Is a Sole Trader?
A sole trader is one of the simplest and most common business structures in the UK. In fact, HMRC data shows that more than half of UK businesses operate as sole traders, with over 3 million individuals.
As a sole trader, you and your business are legally the same entity. You are personally responsible for the business’s income, expenses, and any debts it incurs. Unlike limited company contractors, who operate through a separate legal entity, sole traders report their income through Self Assessment and pay tax on their profits directly to HMRC.
Key characteristics of a sole trader include:
- Full control over how, when, and where you work.
- Personal responsibility for all profits, losses, and liabilities.
- Simpler registration and accounting process compared to running a company.
While becoming a sole trader is quick and flexible, it comes with unlimited liability, meaning your personal assets are at risk if your business runs into trouble.
IR35 and Sole Traders: Does It Apply?
Here’s the short answer: No, IR35 does not apply to sole traders.
IR35 only applies where an intermediary (such as a limited company or umbrella company) exists between the individual and the client. Because sole traders engage directly with their clients, without any intermediary, they are outside the scope of IR35 legislation.
To put it simply:
- IR35 = Worker + Intermediary + Client (three parties involved).
- Sole Trader = Worker + Client (only two parties involved).
Therefore, there is no need for an IR35 assessment when you operate as a sole trader. HMRC already recognises you as self-employed by default.
However, while IR35 doesn’t apply, employment status rules do. These determine whether a sole trader should be treated as self-employed or as an employee for tax purposes, which is why understanding the difference is essential.
Why IR35 Does Not Affect Sole Traders?
IR35 legislation was specifically created to target situations where a contractor uses a limited company to disguise what is essentially an employment relationship. This doesn’t apply to sole traders because they don’t trade through intermediaries.
Sole traders:
- Engage directly with clients (no middleman).
- Are taxed as individuals, not through a company.
- Have a clear self-employment status in most cases.
Because there’s no intermediary, there can be no disguised employment in the IR35 sense. HMRC already taxes sole traders on their business profits through Income Tax and National Insurance Contributions, meaning there’s no opportunity for the kind of tax efficiency that IR35 was designed to address.
That said, HMRC still wants to ensure that sole traders are genuinely self-employed, and that’s where employment status checks come into play.
Employment Status Checks and Sole Traders
Although IR35 doesn’t affect sole traders, HMRC can still review your employment status to confirm you’re correctly classified as self-employed. These checks can occur randomly, during compliance reviews, or if HMRC suspects that your working arrangement is similar to that of an employee.
The same three principles used in IR35 assessments, control, substitution, and mutuality of obligation, are also applied when determining a sole trader’s employment status.
What HMRC Looks For
- Control: If your client dictates your working hours, location, and methods, it may suggest employment.
- Substitution: If you cannot send a substitute to perform the work, this may weaken your self-employment position.
- Mutuality of Obligation: If you are expected to accept ongoing work and your client is obliged to provide it, that can resemble an employment relationship.
If HMRC concludes that your relationship with a client is more like that of an employee, the client (not you) may face penalties, including paying backdated tax and NICs. However, this could still impact your working relationship or future opportunities.
How Sole Traders Can Protect Their Status?
To protect your self-employed status:
- Retain control over how, when, and where you work.
- Use your own tools and resources where possible.
- Avoid exclusive, long-term contracts with a single client.
- Work with multiple clients to demonstrate business independence.
These steps show that you operate as a genuine business rather than a disguised employee.
Which Tax Legislation Actually Applies to Sole Traders?
Since IR35 doesn’t apply, it’s important to understand the two key areas of legislation that do:
1. Onshore Intermediaries Legislation (Agency Legislation)
Introduced on 6th April 2014, the Onshore Intermediaries Legislation, sometimes referred to as the Agency Legislation, was created to combat disguised employment among sole traders working through recruitment agencies.
Before 2014, sole traders could claim they were self-employed by asserting the right to provide a substitute worker. However, HMRC found many of these claims to be false.
Under the updated legislation, if an agency exercises Supervision, Direction, or Control (SDC) over a sole trader, then the agency is required to deduct PAYE and NICs, treating the worker as an employee for tax purposes.
In other words, if your client or agency dictates how you perform your work, you may be treated as an employee for tax reasons, even though IR35 itself doesn’t apply.
2. Traditional Employment Status Rules
For sole traders who work directly with clients (not through an agency), HMRC relies on traditional employment status tests to determine how they should be taxed. These tests are remarkably similar to the ones used to assess IR35 for limited company contractors.
The main factors HMRC examines include:
- Substitution: Can you send another qualified person to carry out the work on your behalf, or must you complete it personally?
- Control: Who decides how, when, and where the work is completed, you or your client?
- Mutuality of Obligation: Is there an ongoing expectation of work, or do you have the freedom to accept or reject assignments?
Other indicators, such as financial risk, use of your own tools, and opportunity to profit, can also support your status as a genuinely self-employed sole trader.
If HMRC determines that a working relationship is akin to employment, they may require the client to treat you as an employee for tax purposes, meaning PAYE deductions and National Insurance Contributions would apply.
How Employment Status Impacts Sole Traders?
While IR35 doesn’t directly affect sole traders, employment status rules can still have a major impact.
The good news is that sole traders do not carry liability for their own employment status misclassification. Instead, the responsibility falls on the client organisation to ensure they are engaging workers correctly.
If HMRC rules that a sole trader is, in effect, an employee:
- The client could be liable for unpaid Income Tax and NICs, along with penalties and interest.
- The sole trader might be moved onto the client’s payroll, reducing take-home pay and flexibility.
Since the IR35 reform in April 2021, many organisations have tightened compliance processes. As a result, some clients may now include sole traders in employment status reviews to reduce their risk of misclassification, even though IR35 itself doesn’t apply.
To safeguard your professional independence, always maintain the characteristics of a self-employed business: work for multiple clients, issue invoices, and retain control over how you deliver your services.
IR35 vs Employment Status: The Key Difference
The confusion between IR35 and employment status is common, but the distinction is vital.
| Aspect | IR35 | Employment Status |
| Who it applies to | Contractors working through intermediaries (e.g. limited companies) | Sole traders and anyone engaged directly by clients |
| Core legislation | Intermediaries Legislation | Employment Status Tests / Agency Legislation |
| Purpose | Prevent disguised employment through intermediaries | Determine whether direct workers are employees or self-employed |
| Who’s liable | The intermediary or the end client | The client engaging the sole trader |
| Outcome | Inside IR35: taxed as employee via PAYE | Misclassified: client must pay backdated tax and NICs |
In short:
- IR35 governs limited company contractors.
- Employment status governs sole traders.
Although the tests used in both frameworks are similar, IR35 does not affect sole traders, but their employment status must still align with HMRC’s self-employment criteria.
How to Stay Compliant as a Sole Trader?
To protect yourself and your clients from unnecessary tax complications, it’s important to demonstrate that you are genuinely self-employed. Here are some practical steps:
Retain Control: Decide how, when, and where you deliver your work. Avoid being managed like an employee.
Use Your Own Equipment: Supplying your own tools and materials supports your independence.
Work With Multiple Clients: This shows you operate as a business rather than relying on a single source of income.
Define Clear Contracts: Ensure contracts state that you are self-employed, responsible for your own taxes, and not entitled to employee benefits.
Carry Business Insurance: Public liability or professional indemnity insurance adds legitimacy to your self-employed status.
Avoid Integration: Don’t use the client’s email, branding, or appear as part of their internal team.
Taking these steps helps reinforce that you are outside any risk of being treated as an employee for tax purposes.
What Are My Tax Obligations as a Sole Trader?
As a sole trader, you and your business are legally one entity. That means you’re personally responsible for reporting your income and paying taxes.
Here’s how it works:
- You must register for Self Assessment with HMRC.
- Each year, you’ll submit your tax return via your Government Gateway account.
You’ll pay:
- Income Tax on your profits (after allowable expenses).
- Class 2 and Class 4 National Insurance Contributions (NICs).
Unlike limited company contractors, you don’t pay Corporation Tax or draw dividends. There’s no need for payroll, and no IR35 assessment, everything is reported through your Self Assessment return.
Common Myths About IR35 and Sole Traders
Let’s clear up some of the most common misconceptions around IR35 and sole traders:
- Myth 1: “IR35 applies to sole traders.”
✘ False. IR35 only applies to those working through intermediaries such as limited companies. - Myth 2: “A sole trader can be inside or outside IR35.”
✘ False. Sole traders are entirely outside IR35 legislation. Employment status rules apply instead. - Myth 3: “Sole traders can’t be investigated by HMRC.”
✘ False. HMRC can still review your employment status to confirm genuine self-employment. - Myth 4: “Sole traders and limited company contractors face the same tax checks.”
✘ Not quite. The tests are similar, but they fall under different legislation.
Closing Note
The IR35 legislation targets those who operate through intermediaries like limited companies, not individuals working directly for clients.
However, sole traders are still subject to employment status rules and agency legislation, which ensure that genuine self-employment is correctly maintained. Misclassification can still lead to tax implications, particularly for the client.
By maintaining independence, managing multiple clients, and defining clear contractual boundaries, you can confidently operate as a genuine, compliant sole trader, without worrying about IR35.
FAQs
Q1. Does IR35 apply to sole traders in the UK?
Ans: No. IR35 applies only to those working through intermediaries, such as limited companies or umbrella companies.
Q2. Can a sole trader be “inside IR35”?
Ans: No. Sole traders cannot be inside or outside IR35 because the legislation doesn’t cover them.
Q3. What legislation affects sole traders instead?
Ans: Sole traders are governed by employment status rules and the Onshore Intermediaries (Agency) Legislation if working through agencies.
Q4. Can HMRC investigate a sole trader’s employment status?
Ans: Yes. HMRC can assess whether your working arrangement resembles employment and take action if taxes are misclassified.
Q5. How can I prove I’m a genuine sole trader?
Ans: Work independently, use your own tools, manage multiple clients, and ensure your contracts clearly define you as self-employed.
