IR35 in the public sector: the basics
The off-payroll working rules -- commonly known as IR35 -- have applied to public sector engagements since April 2017, and to medium and large private sector engagements since April 2021. For contractors working with public sector clients, this means the client (the contracting authority) determines your IR35 status, issues a Status Determination Statement (SDS), and is responsible for deducting PAYE at source via the fee-payer if the engagement is assessed as inside IR35.
The legislation is set out in Chapter 10 of ITEPA 2003 (Income Tax (Earnings and Pensions) Act). It applies to all public sector contracting authorities including central government departments, NHS bodies, local councils, universities, and any other entity that is a public authority under the Freedom of Information Act 2000.
Inside IR35 means your income from the engagement is treated as employment income for tax purposes. National Insurance Contributions and income tax are deducted at source by the fee-payer (typically the umbrella company or agency in the supply chain) before payment reaches you. Outside IR35 means you can receive payment via your limited company and apply the standard dividend tax treatment.
How IR35 affects the public sector tender market
Many government IT and consultancy contracts state their IR35 position directly in the tender documents or invitation to tender. For Digital Specialists and Programmes (DSP) framework engagements, the hiring authority determines IR35 status before issuing the call-off contract. Inside-IR35 does not make the work unavailable or commercially unviable -- it means you need to structure your commercial arrangement accordingly.
The DSP framework (which replaced the Digital Outcomes and Specialists framework) is the primary route to market for resource-based day rate engagements in central government digital teams. Most DSP engagements are assessed as inside IR35 because the buyer is directing the work, the contractor works alongside employed staff, and substitution is rarely a genuine right in practice. However, the assessment is fact-specific and each engagement should be properly evaluated.
G-Cloud engagements, by contrast, are typically outside IR35 because they are outcome-based -- you are providing a managed cloud service or software capability, not personal service to a public sector employer. If your engagement under G-Cloud involves delivering a defined cloud service rather than personal attendance and direction by the client, an outside-IR35 position is more defensible.
Finding IR35-compliant public sector opportunities
Not all public sector contracts carry the same IR35 risk profile. The distinction that matters is between resource-based contracts (day rate, directed work, substitution practically impossible) and outcome-based contracts (defined deliverable, your own methodology, genuine right of substitution, multiple clients concurrent).
Statement of work contracts, where you are engaged to deliver a specified outcome by a defined date, are more likely to support an outside-IR35 determination than day-rate resource contracts where you attend the client site and take direction daily. Central government buyers increasingly structure digital procurement as statement of work contracts precisely to access a broader supplier market and avoid the complications of inside-IR35 supply chains.
Framework lots under G-Cloud and the Crown Commercial Service Technology Products frameworks are typically outside IR35 for service delivery. DSP specialist and programme lot engagements are almost always inside IR35 and should be priced and structured accordingly from the outset.
Setting up as an IR35-compliant bidder
For inside-IR35 engagements, the typical commercial structure is to operate through an umbrella company that processes your income as employment income, deducts PAYE and NICs, and pays you net. You lose the tax efficiency of a limited company dividend structure but retain the ability to work with public sector clients without putting them at risk of off-payroll compliance failures. Make sure your umbrella company is on the HMRC Approved Umbrella Company list and is compliant with the employment agency legislation.
Professional liability insurance requirements do not change under IR35 -- public sector buyers still require professional indemnity (PI) and public liability (PL) insurance regardless of your IR35 status. Check the specific insurance levels required in the tender documents, as these vary by contract value and risk profile.
When responding to a DSP tender or direct public sector contract where inside IR35 applies, you should price your day rate to account for employer NICs (currently 13.8%) that will be deducted by the fee-payer, your umbrella company margin, and the absence of the standard limited company dividend tax treatment. Most experienced inside-IR35 contractors increase their day rate by 25% to 35% compared to their outside-IR35 rate to maintain equivalent take-home income.
How TenderSignal helps IT contractors find public sector work
TenderSignal aggregates G-Cloud and DSP framework application window notices from Find a Tender, direct digital transformation tenders from NHS and council IT teams, and managed service contracts from central government. Set your IT CPV codes (72000000, 72212000, 48000000) and receive a daily digest of live opportunities in your specialism.
The value filter is particularly useful for contractors working inside IR35: filtering to your realistic contract value range avoids wasting time on large programme management tenders that are likely to be outside your commercial scope, and focuses your attention on contracts where your day rate will be commercially competitive. Pipeline intelligence flags G-Cloud and DSP framework re-procurement windows months before they open, giving you time to prepare your service definition and apply as soon as the window opens.
See also: G-Cloud framework opportunities and Digital Outcomes and Specialists tenders. Create a free TenderSignal account to see live IT and digital public sector contracts matched to your specialism.