IR35 legislation can be a cause of uncertainty across the contracting landscape, particularly for individuals operating as sole traders. While the legislation is primarily aimed at those working through limited companies and in some cases partnerships, there are some questions which remain around how IR35 operates in relation to sole trader engagements.
Read our article, created in collaboration with Markel Tax, to understand whether IR35 applies to sole traders, how employment status is assessed in practice, and what both contractors and end clients need to consider to stay compliant with HMRC expectations.
For an in-depth explanation of what IR35 is, visit our dedicated article.
Does IR35 apply to sole traders?
No, IR35 does not apply to sole traders. The IR35 legislation only applies where services are provided through an intermediary, however sole traders contract directly with their clients, meaning there are no intermediaries in place.
Without an intermediary in the contractual chain, the IR35 legislation cannot apply, which is why IR35 investigations and tribunal cases almost always involve limited company contractors, not sole traders.
Why IR35 does not apply to sole traders?
For IR35 to apply, three parties must exist: the worker, an intermediary, and the end client.
When it comes to sole trader arrangements, they primarily solely involve the worker and the client, and as there is no separate legal entity acting as an intermediary, the engagement falls outside the scope of IR35. This distinction is crucial and explains why IR35 is not technically relevant to sole trader engagements.
Employment status and sole traders
Although IR35 does not apply to sole traders, employment status does apply. HMRC can still assess whether a sole trader is genuinely self‑employed or whether the working relationship resembles employment. The same core principles used in IR35 cases are applied to employment status assessments, including:
- Control – who decides what, where, when, and most importantly how the work is done
- Substitution – whether a genuine substitute can be sent
- Mutuality of obligation – whether there is an obligation to offer and accept work
The difference with IR35 is where the tax risk sits: if a sole trader is deemed to be working as an employee, it is typically the client who becomes liable for unpaid tax and National Insurance, not the sole trader.
Onshore Employment Intermediaries’ Legislation and sole traders
Sole traders working through recruitment agencies, or other intermediaries, should also be aware of the Onshore Employment Intermediaries Legislation.
Where a sole trader is subject to supervision, direction, or control as to the manner in which they perform the services by the end client or any persons, this legislation will apply. In these cases, PAYE and National Insurance deductions will need to be made, even though the individual is not operating through a limited company.
This legislation exists separately from IR35 but may be a cause of confusion around whether sole traders are “inside IR35”.
How sole traders can protect their status
Certain factors may increase the likelihood of HMRC questioning employment status, so where possible, it is important to be cautious of the following:
- Working for a single client over a long period
- Being integrated into the client’s internal teams
- Using the client’s equipment
- Being paid regularly rather than on a project basis
- Having limited control over how work is delivered
Whilst these factors may indicate risk, HMRC considers at the overall working arrangement when assessing employment status, rather than a single factor.
Frequently asked questions about sole traders and IR35
What are the tax obligations of a sole trader?
As a sole trader, you are responsible for registering with HMRC and submitting an annual Self-Assessment tax return. As of April 2026, sole traders with a qualifying income exceeding £50,000 are now required to provide quarterly tax returns. You are obligated to pay Income Tax and National Insurance on your business profits, after allowable expenses. Depending on your turnover, you may also need to register for VAT and make payments on account towards future tax bills.
Can a sole trader be “inside IR35”?
No, a sole trader cannot be inside IR35. Being “inside” or “outside” IR35 solely applies to individuals working through intermediaries such as limited companies, however a sole trader’s employment status can still be challenged.
What is the end client’s responsibility when engaging as a sole trader?
When engaging a sole trader, the end client is responsible for ensuring the individual is genuinely self‑employed for tax purposes. This includes assessing employment status based on working practices, not just contract wording. If the relationship is later deemed to be employment, the client may be liable for unpaid tax and National Insurance.
Discover our knowledge centre for more help and guidance or read more about what insurance a sole trader may need.
Please note: This article provides guidance for information purposes only and is accurate at the time of production. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Caunce O’Hara. Caunce O’Hara is not affiliated with any of the brands, companies or websites mentioned in this article.
