Why Clients Default to Inside IR35 (and What This Means for Contractors)

If you’ve ever had a contract assessed as inside IR35 and felt frustrated or powerless, you’re not alone.

Many contractors find that roles which should fall outside IR35 are classified inside – sometimes because the client simply doesn’t want to take the risk.

Since the 2021 reforms, the responsibility for deciding IR35 status (and the potential tax liability if that decision is wrong) moved from the contractor to the end client. That single change reshaped the market. Clients became cautious, sometimes overly so.

Understanding why this happens helps you plan ahead, respond constructively, and recognise when an assessment might not have been carried out correctly.

• Since 2021, clients – not contractors – carry the IR35 tax liability
• Each engagement must be assessed individually, blanket decisions are non-compliant
• Fear of penalties and administrative burden drives many clients to play safe
• Contractors can respond constructively by demonstrating independence and professionalism
• The market is slowly rebalancing as clients gain confidence in compliant, case-by-case assessments

Before 2021, contractors decided their own IR35 status and carried the financial risk if HMRC later disagreed.

Under the off-payroll working rules introduced for medium and large organisations, that responsibility moved to the end client. If HMRC challenges an outside IR35 determination and wins, the client becomes liable for back-dated tax, employer National Insurance, interest and penalties.

The legislation requires every engagement to be assessed on its own merits. Clients must issue a written Status Determination Statement (SDS) explaining the outcome and their reasoning.

Applying a single “inside IR35” decision to every contractor – known as a blanket determination – is not compliant with HMRC’s guidance.

Clients can use a consistent process, but they must still review each role individually, taking into account working practices, control, substitution and other relevant factors.

The potential consequences of getting a status call wrong are serious:

• Large, unexpected tax bills
• Reputational damage if HMRC investigates
• Costly internal audits and adviser fees

It’s easier (and seemingly safer) for some organisations to default everyone to inside IR35 rather than invest time and expertise in proper assessments.

If HMRC decides a role was wrongly treated as outside IR35, the client can be pursued for multiple years of unpaid tax, employer NI, and interest. In high-profile cases, HMRC has publicly named organisations that failed to comply, so reputational damage is also a major concern.

Each assessment requires a review of contracts, working arrangements and reporting lines.

For companies with dozens or hundreds of contractors, this creates a heavy administrative burden. Many lack in-house IR35 specialists and rely on cautious HR or legal teams who prefer to play safe.

A blanket determination is when a client treats all contractor roles as inside IR35 without reviewing individual circumstances.

This approach is non-compliant because HMRC expects clients to make individual, reasoned assessments supported by evidence and to document those decisions in the SDS.

• Simplicity – one policy is quicker to implement
• Fear – perceived as lower risk than making an outside call and being wrong
• Lack of clarity – some organisations misunderstand their legal obligations

Blanket decisions create unnecessary friction.

• Contractors lose the ability to work independently through their Limited Companies
• Clients reduce their own flexibility and talent pool, as skilled contractors often move to competitors offering fairer, case-by-case assessments
• HMRC guidance is clear: consistency is fine, but copy-and-paste decisions are not

When you receive an inside IR35 SDS that doesn’t feel accurate, avoid frustration or blame.

The client’s motivation is usually risk management, not mistrust of you personally.

Keep communication collaborative and polite – your professionalism strengthens your credibility.

Before a determination is finalised, share evidence that you operate as a genuine business:

• Defined scope of work or statement of deliverables
• Proof of business insurance
• Examples of previous projects delivered autonomously
• Confirmation that you set your own schedule or supply your own equipment

These signals can reassure cautious clients that classifying your role as outside IR35 is both fair and defensible.

It’s perfectly reasonable to note, respectfully, that HMRC requires individual assessments.

Sometimes clients default inside simply because they’re unaware that blanket decisions breach compliance. A calm, informed reminder may encourage them to review your engagement properly.

If you believe an SDS is wrong, you can formally challenge it.

• Write to the client referencing the SDS, explaining why you think it’s inaccurate
• Provide factual evidence (contract clauses, scope documents, working-practice examples)
• The client must respond in writing within 45 days, either confirming or amending the decision

Even if the result doesn’t change, the process demonstrates that you understand the rules and value compliance.

Inside IR35 contracts often come with higher client costs – employer NI contributions, payroll administration, and the perceived risk premium
At the same time, contractors face lower take-home pay
Understanding both sides lets you negotiate from a position of mutual awareness:

• Clients factor in risk, contractors factor in tax impact
• A fair compromise rate helps maintain value for both parties

The initial wave of over-cautious behaviour after the 2021 reforms is slowly settling.
Many organisations now recognise that blanket inside IR35 policies are unsustainable and non-compliant.
To protect themselves properly, they’re investing in:

• Independent IR35 audits and role-specific reviews
• Specialist software or consultancy assessments
• Training for hiring managers on applying tests consistently

As confidence and understanding grow, more clients are returning to fair, role-by-role assessments, creating a healthier market for genuine contractors.

IR35 has made contracting more complex for everyone, and it’s understandable that clients sometimes err on the side of caution.

But when both sides understand their responsibilities – and when assessments are done properly – fair outcomes are possible.

If you’ve received an inside IR35 decision that feels inaccurate or want advice on how to approach the discussion professionally, we can help.

At SG Accounting, we support contractors and clients alike – from reviewing SDSs and clarifying compliance to helping you stay organised across both Limited Company and umbrella arrangements.

(Header image: designed by Drazen Zigic – Freepik.com)