Public Sector IR35 Contract Template UK
Operating through a Personal Service Company in the public sector exposes contractors to strict IR35 scrutiny under Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, where the end-client — not the contractor — determines employment status. Without a properly drafted contract, contractors risk HMRC reclassifying their engagement as disguised employment, triggering substantial tax liabilities, National Insurance arrears, and penalties for all parties involved. A robust public sector IR35 contract must accurately reflect the true working arrangement, demonstrating genuine substitution rights, limited control, and financial risk — the three pillars HMRC inspectors examine most closely. Recruiters and public bodies also need clear contractual protections confirming their Status Determination Statement obligations. Getting this documentation right from day one is essential. Generate a compliant public sector IR35 contract template now and protect your engagement.
Generate your IR35 Agreement free →Key clauses in a IR35 Agreement
IR35 Status Determination Statement
This clause records the end-client's formal Status Determination Statement (SDS) as required under Chapter 10 ITEPA 2003, confirming whether the engagement falls inside or outside IR35. Since April 2021, public sector clients have been legally obligated to issue an SDS and share it with the fee-payer and contractor, making its contractual inclusion essential for compliance and audit purposes.
Right of Substitution
This clause grants the contractor a genuine, unrestricted right to send a qualified substitute to perform the services, a factor HMRC and courts treat as strongly indicative of self-employment outside IR35. For the substitution right to carry weight — as reinforced in cases like Autoclenz Ltd v Belcher [2011] — it must be real and operable in practice, not merely a contractual fiction inserted to game status tests.
Mutuality of Obligation Exclusion
This clause explicitly states that neither party is obliged to offer or accept ongoing work beyond the defined contract period, negating the mutuality of obligation that HMRC uses as a primary indicator of employment. Clearly limiting obligations to a specific project or deliverable helps contractors demonstrate a business-to-business relationship rather than a continuing employment arrangement under the tests established in Ready Mixed Concrete v MPNI [1968].
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Generate free →Frequently asked questions
Who is responsible for determining IR35 status on a public sector contract?
Under Chapter 10 ITEPA 2003, the responsibility for making an IR35 status determination in the public sector lies with the end-client organisation, not the contractor or their PSC. The end-client must issue a Status Determination Statement (SDS) to both the contractor and the fee-payer, such as a recruitment agency, before the engagement begins. If no SDS is issued, the liability for any unpaid tax can fall back on the client itself.
Can I challenge an inside IR35 determination on a public sector contract?
Yes — under the Chapter 10 ITEPA 2003 rules, contractors have the right to formally dispute a Status Determination Statement through the client's disagreement process, which the client must respond to within 45 days. If the client fails to respond or cannot provide reasoned grounds for their determination, the liability for PAYE and National Insurance shifts back to them. Contractors should ensure their contract documents the SDS and any challenge process clearly.
Does working inside IR35 in the public sector mean I should stop using my PSC?
Not necessarily — many contractors continue operating through their Personal Service Company even when inside IR35, but the fee-payer must deduct Income Tax and National Insurance at source before paying the PSC, effectively treating the income as deemed employment income. The PSC can still receive the net payment and contractors may retain some corporation tax efficiencies on other income streams. However, contractors should review their overall tax position with an accountant, as the benefits of PSC trading are significantly reduced on inside-IR35 engagements.
The information on this page is for general informational purposes only and does not constitute legal advice. Contracto generates AI-assisted contract templates — they are not a substitute for advice from a qualified solicitor. For high-value or complex engagements, always seek independent legal review.