IR35 Explained: Chapter 8 vs Chapter 10 — What Every Contractor Must Know

IR35 is probably the most discussed and most misunderstood piece of tax legislation for UK contractors. Many contractors treat it as a binary "inside or outside" question. The reality is more structured — and understanding the structure helps you manage your risk intelligently rather than simply hoping for the best.

This guide explains what IR35 is, how the two chapters work, what the employment status tests actually assess, and what being inside IR35 costs in real money.

The two-chapter framework

IR35 legislation sits in two parts of the Income Tax (Earnings and Pensions) Act 2003:

Chapter	Who It Applies To	Who Determines Status	Who Bears Liability
Chapter 8 (IR35 original rules)	Contracts with small end-clients	The worker's own PSC	The worker's PSC
Chapter 10 (off-payroll working, 2021)	Contracts with medium and large end-clients	The end-client	The fee payer (client or agency)

What makes an end-client "small"?

A company is treated as small if it meets at least two of the following three criteria:

• Annual turnover not more than £10.2 million
• Balance sheet total not more than £5.1 million
• Fewer than 50 employees

This is the Companies Act small company definition. It applies to the end-client — not to your PSC. A large number of businesses in the UK meet this definition, including many SMEs, startups, and scale-ups. This matters because the small company exemption is far more widely applicable than many contractors realise.

Chapter 8: You make the call

Under Chapter 8, your personal service company is responsible for determining whether the engagement falls inside or outside IR35. If you incorrectly determine that you're outside IR35 and HMRC disagrees, your PSC faces the tax and NIC liability — plus interest and potentially penalties.

The determination must be based on the genuine working practices of the engagement, not just the contract wording. HMRC has long taken the view that the actual day-to-day relationship matters more than what the contract says.

Chapter 10: The client makes the call

From April 2021, medium and large private sector clients (and all public sector clients since April 2017) must issue a Status Determination Statement (SDS) for every engagement with an off-payroll worker. The SDS confirms whether the client's view is inside or outside IR35, with written reasons.

Under Chapter 10:

• The end-client issues the SDS and is liable if the determination is incorrect
• The fee payer (the client, or an agency in the chain) operates PAYE deductions
• Your PSC invoices as normal but receives payment net of tax deductions
• You have the right to dispute the SDS through the Client Status Disagreement process

The shift of liability from the contractor to the client was intentional — it was designed to make large organisations take the determination seriously, rather than simply assuming all contractors are outside IR35.

The three employment status tests

Whether your engagement falls inside or outside IR35 is assessed against a set of employment status tests derived from case law. There is no single test that determines the outcome — it is a holistic assessment of the working relationship. However, three factors carry the most weight:

1. Substitution

Does your contract give you a genuine right to send a substitute to carry out the work? And — critically — is that right real in practice, or merely a clause in a contract?

A genuine right of substitution is one of the strongest outside IR35 indicators. If you can send a colleague or another professional to complete the work, and the client would accept that person (without having the right to veto based on personal preference), this suggests you are providing a service rather than your personal labour.

Tribunal cases have repeatedly found that a substitution clause which says the right exists, but where the client has never actually accepted a substitute and would not do so in practice, carries little weight.

2. Control

Who controls what work you do, how you do it, when you do it, and where you do it?

High levels of client control suggest employment. An employee is told what to do, how to do it, when to come in, and where to sit. A contractor should have autonomy over their working methods, even if the deliverable is specified by the client.

Working from the client's office, five days a week, using their equipment, attending their all-hands meetings, and being managed by their managers — these are strong inside indicators. Working from home, using your own tools, setting your own hours, and delivering outcomes rather than presence — these are outside indicators.

3. Mutuality of Obligation (MOO)

Is there an ongoing obligation on the client to offer you work, and on you to accept it? This is the defining characteristic of an employment relationship.

An employee is expected to turn up and work. The employer is expected to provide work and pay for time. In a contract relationship, there should be no such mutual obligation — you provide a specific deliverable, the client pays for it, and neither party owes the other ongoing commitment beyond that.

In practice, MOO is the hardest test for long-term contractors in a single-client situation. If you've been working for the same client for three years and they've always offered work and you've always accepted, the presence of MOO is hard to deny.

What does being inside IR35 actually cost?

This is the question every contractor should know the answer to before they take on a new contract. The financial impact of inside IR35 is substantial.

Under inside IR35 (Chapter 8 or Chapter 10), your company's income is treated as a deemed salary. The calculation works as follows for a contractor billing £100,000 per year:

Item	Outside IR35	Inside IR35
Gross receipts	£100,000	£100,000
Salary (£9,100)	−£9,100	N/A
Corporation tax (~19%)	~−£17,000	N/A
Dividends drawn	£50,270	N/A
Personal income tax	~£3,255	N/A
Take-home estimate	~£67,000+	N/A
5% allowance deducted	N/A	−£5,000
Employer NIC (13.8%)	N/A	~−£11,600
Deemed salary	N/A	~£83,400
Income tax + employee NIC	N/A	~£28,000
Take-home estimate	N/A	~£55,400

On £100,000 gross billing, inside IR35 costs approximately £11,000–£15,000 more in tax than an equivalent outside position — depending on how efficiently the outside position is managed. This is why IR35 status matters and why a proper contract review before signing is a worthwhile investment.

Challenging an inside SDS under Chapter 10

If your Chapter 10 client issues an inside SDS that you believe is wrong, you have the right to formally dispute it through the Client Status Disagreement process. You must raise the dispute in writing within 45 days, explaining why you believe the determination is incorrect.

The client has 45 days to reconsider. If they maintain the inside determination, you can accept it or pursue the matter further — potentially through HMRC's Check Employment Status for Tax (CEST) tool, or through the courts if necessary.

In practice, challenges succeed most often where there is clear evidence of genuine substitution, limited control, or working practices that genuinely differ from employment. If you're working on-site five days a week using their equipment, a challenge is unlikely to succeed regardless of contract wording.

Practical steps to protect your outside IR35 position

IR35 risk is managed over time through genuine working practices, not just contract drafting. Here are the most effective steps:

1. Use your right of substitution — if your contract allows it, actually use it where possible. Even one genuine substitution on record is powerful evidence.
2. Work from home or your own premises where the engagement allows — reduced client-site presence reduces the control indicator.
3. Use your own equipment — your own laptop, your own phone, your own software subscriptions. If your client supplies all your tools, that is an inside indicator.
4. Maintain multiple clients simultaneously where possible — exclusivity and long single-client engagements are the biggest MOO risk factors.
5. Get a proper contract review before signing — Qdos, IR35 Shield, and Kingsbridge are the leading specialist reviewers. Cost is typically £100–250 and is money well spent.
6. Keep records — your working practices records, correspondence confirming flexibility and autonomy, and evidence of substitution rights all build your defence position.

The one thing your accountant cannot do

A general accountant — including us — can explain IR35, help you understand the risk factors, model the financial impact, and flag when a contract looks concerning. What no accountant should do is give you a confident "you are outside IR35" opinion without a dedicated contract and working practices review by an IR35 specialist.

IR35 determinations carry legal weight. An incorrect determination can result in a tax bill covering multiple years, plus interest and penalties. The cost of a proper specialist review is trivial compared to that risk.

Our approach: we identify risk indicators, explain the framework, and refer to specialist reviewers when a contract warrants it. We include IR35 awareness briefings in our Standard and Premium packages as standard.

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