IR35 Guide for Sole Traders (and Why It Doesn’t Apply to You)

Ryan Scott • 12 May 2025

Self-Employment vs Disguised Employment: Know the Difference

If you’re self-employed — whether as a contractor, freelancer, or running your own solo business — chances are you’ve come across the term IR35. It’s one of those bits of tax legislation that often confuses people and, at times, causes unnecessary worry.

Let’s clear things up: IR35 doesn’t apply to sole traders. But that doesn’t mean there aren’t other important tax and compliance considerations. At SBX Accountants, we’re here to help self-employed individuals stay informed, compliant, and efficient — without the confusion.

A man and a woman are sitting at a table holding a model airplane discussing IR35 rules.

What Is IR35 and Why Was It Introduced?

IR35 (also known as the off-payroll working rules) is a piece of legislation introduced by HMRC to tackle what it sees as "disguised employment" — situations where someone works like an employee but avoids PAYE tax and National Insurance by operating through a limited company (usually their own).

This setup often results in significant tax savings, which HMRC argues isn't fair when the working relationship is effectively no different to that of a regular employee. As such, IR35 is used to assess the true nature of these relationships and ensure the correct tax treatment.

To determine if a contract is “inside” or “outside” IR35, HMRC considers factors such as:

Control: Who decides how, when, and where the work is done?
Substitution: Can the individual send someone else to do the work?
Mutuality of Obligation: Is there an ongoing expectation of work?

If you’re inside IR35, HMRC treats you like an employee for tax purposes, meaning PAYE must be applied. If you’re outside IR35, you’re considered genuinely self-employed and manage your own tax obligations.

Why Sole Traders Are Not Caught by IR35

Here’s the key difference: IR35 only applies where there’s an intermediary — usually a limited company through which the work is delivered. Sole traders operate without any intermediary, dealing directly with clients.

Since there are only two parties involved — you (the sole trader) and the client — there’s no structure in place for disguised employment. As such, sole traders are completely outside the scope of IR35.

That said, sole traders can still come under scrutiny via HMRC employment status checks, which aim to ensure you’re not, in effect, an employee being paid as a contractor.

Employment Status Reviews Still Apply

Even if IR35 isn’t relevant to you, HMRC may still review your working relationships to decide if you’re genuinely self-employed. These reviews assess:

Whether you set your own hours and work independently
If you use your own tools, equipment, or workspace
Whether you’re financially liable if things go wrong
If you have multiple clients or a long-term exclusive agreement with just one

If HMRC believes you’re functioning like an employee, the client may face backdated PAYE liabilities, and your tax treatment could change — even as a sole trader.

To reduce risk, make sure your contracts and working practices reflect true independence. Diversify your client base, avoid set hours or detailed supervision, and demonstrate that you take on business risk.

Being a Sole Trader: Simpler, But With Trade-Offs

Operating as a sole trader is the most straightforward route into self-employment. There’s less red tape, less admin, and you can start trading immediately. You’re taxed on profits through Self Assessment and pay Class 2 and Class 4 NICs.

However, there are limitations. You’re personally liable for business debts, and you don’t have access to some of the tax planning opportunities available to limited company directors — like drawing income through a combination of salary and dividends.

As many sole traders grow, they eventually consider incorporation, at which point IR35 becomes a relevant consideration for those contracting through their own company.

SBX Accountants: Helping Sole Traders Stay Compliant and Confident

At SBX Accountants, we provide hands-on, tailored support for sole traders and small business owners across the UK.

Our accounting packages include:

✅ Dedicated accountant

✅ QuickBooks online accounting software

✅ Same-day response to queries

✅ Year-round tax advice and support

✅ Annual accounts and tax return filing

✅ Business and cashflow guidance

Whether you’re starting out or ready to scale and incorporate, we’re here to help you understand your obligations, maximise efficiency, and grow your business confidently.

For a deeper dive into how IR35 could impact you, visit our dedicated page at SBX Accountants - IR35 Guide

Ready to simplify your accounting?

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