If you run your business as a sole trader, IR35 does not apply to your work. Here, we explain why this is the case and why self-employed people should still be aware of the Agency Legislation and other rules.
What is a sole trader?
The most popular business structure in the UK is the sole tradership, which comprised 57% of all UK businesses in 2025. This equates to around 3.2 million people.
It is simple to become a sole trader. From a tax perspective, you (the individual) and your business are treated as a single entity. You pay income tax and NICs annually via self-assessment.
However, unlike trading through a limited company, your liability is unlimited as a self-employed person if things go wrong.
Despite the ease with which you can set up as a sole trader, there are some fundamental reasons why professional contractors rarely trade this way.
Contractors rarely work as sole traders
Most contractors work via an intermediary – typically a limited company or an umbrella.
There are two main reasons why this is the case:
The Income Tax (Earnings and Pensions) Act 2003 can restrict genuine self-employment when a recruitment agency is involved in the relationship between the supplier and the client.
Also, if you are hired as a sole trader and subsequently found to be an ’employee’ for tax purposes, you could claim employment rights from your recruiter.
The recruiter could also become liable for additional tax and NICs.
From the contractor’s point of view, there are also several compelling reasons why a limited company is a more appropriate business structure to trade under, compared to self-employment:
- Your liability is limited should things go wrong.
- The ‘limited’ status portrays a professional image.
- There are some tax benefits to trading via a limited company (although they have been significantly reduced in recent years).
Sole traders and IR35 – no intermediary
If contractors rarely work as sole traders for the above reasons, then is IR35 even a consideration?
The answer lies in how IR35 actually works.
The rules were created in 2000 to clamp down on workers’ use of intermediaries (limited companies). Were it not for the existence of the intermediary, some workers would be considered ’employees’—subject to standard employment taxes.
So, IR35 does not apply to an engagement if the worker is not working via an intermediary (a limited company).
This is because IR35 applies only when a worker provides services through an intermediary, such as a limited company.
However, employment status is not merely a consideration for limited company workers.
IR35 vs agency legislation (quick comparison)
| Rule | Who it applies to | What it targets |
|---|---|---|
| IR35 | Limited company contractors | Disguised employment via intermediaries |
| Agency legislation (Section 44) | Sole traders working via agencies | Workers are treated as self-employed but operate like employees |
Sole traders and disguised employment
Just as IR35 addresses so-called disguised employment by limited company contractors, agency legislation addresses disguised employment by sole traders.
In recent years, some employers have preferred to hire ‘self-employed’ workers rather than employees to save money and avoid assuming employer-type obligations.
As a result, the Government drafted Agency Legislation (a.k.a. Section 44) to tackle this practice (see ESM2029).
If you are deemed to be working under supervision, direction or control (SDC), then you are deemed to be an employee for tax purposes.
You can learn more about the agency legislation – as clarified in 2016 – here.
Sole trading and IR35 – in conclusion
Becoming a sole trader does not circumvent the IR35 rules, as the legislation only applies to intermediaries.
As we have discussed, if recruiters routinely hired sole traders, separate employment status rules would still apply.
Put simply, if you are not truly working in business on your own account, you will likely be treated as an employee for tax purposes, regardless of the business structure you trade under.
The key is to trade outside IR35 legitimately as a limited company worker, as demonstrated by the terms of your contracts and how you carry out this work (your working practices). You can read more in our guide to inside and outside IR35.
Read our core IR35 guides to get started!
Worried about an IR35 challenge?
HMRC investigations can be expensive and time-consuming. Qdos provides expert defence and financial cover if your status is challenged.