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.
IR35 exists to ensure that workers who operate like employees — but use a limited company structure — pay broadly the same tax as employees. It does not prevent you from using a limited company. It taxes you as if you were employed, if the working relationship resembles employment.
The two-chapter framework
IR35 legislation sits in two chapters of Part 2 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; public sector 2017, private sector 2021) | Contracts with medium and large end-clients, and any public sector client | The end-client | The fee payer — but it shifts to the client where the client failed to take reasonable care |
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 £15 million
- Balance sheet total not more than £7.5 million
- Not more than 50 employees
These are the Companies Act small company thresholds as they now stand, following an increase that applies to financial years beginning on or after 6 April 2025. The previous limits were £10.2 million turnover and £5.1 million balance sheet total; the 50-employee test did not change. The test applies to the end-client, not to your PSC.
This is the detail that catches people out, and getting it wrong means getting the chapter wrong. For off-payroll purposes a client's size for a tax year is determined by reference to an earlier financial year, and a company generally has to meet two of the three conditions across two consecutive financial years before its status changes. Because the new limits only bite on financial years beginning on or after 6 April 2025, and accounts for those years are not filed until well into 2027, the higher thresholds do not govern most determinations yet.
HMRC's guidance at ESM10006 confirms that for a client with an ordinary 12-month financial year, the earliest tax year the new thresholds can take effect is 2027/28. A small number of clients with unusual year-ends may transition in 2026/27. The practical position for the 2026/27 tax year is therefore:
- For most engagements running now, the old £10.2 million and £5.1 million limits still decide whether your client is small.
- A client with, say, £12 million of turnover is very likely still medium or large for 2026/27 — Chapter 10 applies, and they owe you a Status Determination Statement.
- Do not assume a client has become small because the headline thresholds went up. Ask them directly which financial year they are using and what their status is for the current tax year — a Chapter 10 client should be able to answer that.
Two further wrinkles on the size test. Where the client is part of a group, the figures are taken across the group rather than the single company, so a small subsidiary of a large group is not small. Where the client is not a company — a partnership, an LLP or an individual — a simplified turnover-only test applies instead of the two-of-three test above. Public sector clients are outside the exemption altogether: Chapter 10 applies to them regardless of size.
Subject to all of that, a large number of UK businesses do meet the small definition, including many SMEs, startups and scale-ups, so the exemption is more widely applicable than many contractors realise — and it will become more so from 2027/28.
Do not assume that every private sector client triggers Chapter 10. If your end-client is small on the size test as it applies for the current tax year, Chapter 8 applies — and you make your own status determination. Many contractors in the SME space have Chapter 8 contracts without realising it. Equally, do not assume a client is small just because the headline thresholds rose: check the year their status is based on.
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.
The other route into Chapter 8: overseas clients
Client size is not the only reason Chapter 8 applies. Chapter 10 only operates where the end-client is UK resident or has a UK permanent establishment. Where your client is wholly overseas with no UK connection, Chapter 10 does not apply at all — regardless of how large the client is — and the determination falls back to you under Chapter 8. Contractors working for US or European clients directly are frequently in this position and assume, wrongly, that IR35 is simply not their problem. It is: you are making the determination, and your company carries the liability if you get it wrong. Cross-border engagements also raise residence and place-of-performance questions that sit outside IR35, so these are worth specific advice rather than a rule of thumb.
Chapter 10: The client makes the call
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 must take reasonable care in reaching it
- The fee payer (the client, or an agency in the chain) operates PAYE deductions and carries the liability
- Liability shifts from the fee payer to the client where the client failed to take reasonable care — a blanket determination applied across all contractors without considering individual engagements does not amount to reasonable care
- Your PSC invoices as normal but receives payment net of tax deductions
- You have the right to dispute the SDS through the client-led 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.
A common worry on an inside Chapter 10 engagement: PAYE has already been deducted before the money reaches your company, so is it taxed again when you take it out? No. Amounts your PSC receives that have already been through PAYE under Chapter 10 can be paid on to you without a further income tax or NIC charge, and the deemed payment is not taxed again as company profit. Your accountant does need to record it correctly, but the tax has been paid once, at source.
The employment status tests
Whether your engagement falls inside or outside IR35 is assessed against tests derived from case law, principally the three conditions set out in Ready Mixed Concrete v Minister of Pensions (1968), which the Supreme Court reaffirmed as the governing framework in 2024. In outline:
- Personal service — does the worker agree to provide their own work and skill in return for payment? The right of substitution is the converse of this: a genuine right to send someone else undermines personal service.
- Control — is there a sufficient framework of control by the engager?
- The rest of the picture — are the other terms and circumstances consistent with employment, or with someone in business on their own account?
The first two are threshold conditions: if either is absent there is no employment. But they are relatively easy to satisfy, so in practice most cases are decided at the third stage, on the whole factual picture. Mutuality of obligation sits within the first condition, and is widely misunderstood — see below. No single factor decides the outcome.
1. Personal service and the right of 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.
The distinction the courts draw is between an unfettered and a fettered right. An unfettered right — you may send a suitably qualified replacement, full stop — is close to decisive against employment, on the reasoning in Express & Echo Publications v Tanton. A right that is fettered, because the client can approve or reject the substitute, or because it only operates when you are unable to work, carries much less weight; MacFarlane v Glasgow City Council is the usual authority. Most contractor substitution clauses are fettered, which is why they rarely carry a determination on their own.
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 — and why the old argument no longer works
Mutuality of obligation (MOO) is the most misunderstood concept in IR35, and the position changed materially in 2024. The argument contractors were long encouraged to make — "there is no obligation on my client to offer work and none on me to accept it, so there is no mutuality" — is no longer available.
In Professional Game Match Officials Ltd v HMRC [2024] UKSC 29, decided on 16 September 2024, the Supreme Court held that mutuality at the first Ready Mixed Concrete stage requires only the "wage-work bargain": you agree to do work, the engager agrees to pay for it. On that basis:
- Mutuality exists in essentially every individual engagement where work is done for payment. There is no need for an ongoing obligation to offer or accept future work.
- A right for either party to terminate or cancel without penalty does not negate it. In PGMOL the referees could withdraw right up to arriving at the ground, and mutual obligations were still held to exist from the moment an appointment was accepted.
- The distinction the Court drew was between an overarching or "umbrella" contract, which does need continuing obligations across the whole period, and the individual engagement, which does not.
HMRC updated its Employment Status Manual in February 2025 to reflect this reasoning. The practical consequence for you: do not build a defence on the absence of mutuality. Arguing that you had no obligation to accept work will not carry an enquiry, and leaning on it wastes the ground you should be standing on instead.
4. The rest of the picture — in business on your own account
Because personal service and control are now relatively easy for HMRC to establish, this third stage is where most engagements are actually decided. It is an evaluation of the whole relationship: financial risk, provision of equipment, the ability to profit from sound management, whether you are integrated into the client's organisation, exclusivity, how you present yourself to the world, and whether the arrangement looks like a business dealing with a client or a person taking a job.
PGMOL itself makes the point. When the case returned to the First-tier Tribunal, the decision issued on 1 May 2026 concluded that although mutuality and control were both present, the referees were not employees. The Tribunal weighed their freedom to decline and withdraw from appointments, the absence of obligations between matches, and the fact that they refereed alongside other full-time work. Mutuality and control got HMRC through the door; the overall picture is what decided it.
That is the lesson for contractors. The factors in the two columns below are not a scoring system, but they are the material the third stage is judged on.
- Genuine right of substitution used in practice
- Works from own premises / home
- Uses own equipment
- Multiple concurrent clients
- Fixed-price project deliverables
- Controls own working methods and hours
- Not integrated into client's team
- Bears financial risk (e.g., rectifies errors at own cost)
- Works from client's office daily
- Uses client's equipment
- Single client for extended period
- Managed by client's management chain
- Attends client team meetings / socials
- Fixed hours specified by client
- Substitution clause is contractual only, never used
- Continuous rolling contracts
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 real, though smaller than the figures usually quoted once every tax is counted on both sides.
Assumptions: £100,000 of billing, no business expenses (a simplification — real expenses would reduce both columns), a single contractor with no other income, rest-of-UK rates, and the whole year on one basis. Our salary vs dividends guide models a company with £8,000 of expenses that deliberately stops drawing at £50,270; here both columns extract the full £100,000, because an inside-IR35 deemed payment leaves you no choice about that. The two guides therefore answer different questions and their figures are not interchangeable.
The figures below illustrate the Chapter 8 position, where your PSC performs a "deemed employment payment" calculation. This calculation retains a 5% allowance for notional business expenses — an allowance that was removed for Chapter 10 (off-payroll) engagements, where the fee payer instead operates PAYE on the contract value directly and no 5% allowance applies. The mechanics therefore differ depending on which chapter you fall under, and a Chapter 10 engagement is slightly worse than the figures below because the 5% is not available. Both columns extract the entire £100,000 for the year, since a deemed payment is paid out in full through payroll and the outside column has to match it to be comparable. The example uses 2026/27 rates:
| Item | Outside IR35 | Inside IR35 |
|---|---|---|
| Gross receipts | £100,000.00 | £100,000.00 |
| Salary (£12,570) | −£12,570.00 | N/A |
| Employer's NIC on salary (15% above £5,000) | −£1,135.50 | N/A |
| Profit before corporation tax | £86,294.50 | N/A |
| Corporation tax (marginal relief band, 22.15% effective) | −£19,118.04 | N/A |
| Dividends drawn (full profit after CT) | £67,176.46 | N/A |
| Personal tax on dividends (10.75%/35.75% after allowance) | −£14,536.83 | N/A |
| Take-home estimate | ~£65,210 | N/A |
| 5% allowance deducted | N/A | −£5,000.00 |
| Employer's NIC (15% on the deemed salary above £5,000) | N/A | ~−£11,739.13 |
| Deemed salary | N/A | ~£83,260.87 |
| Income tax (20%/40% on deemed salary) | N/A | ~−£20,736.35 |
| Employee's NIC (8%/2% on deemed salary) | N/A | ~−£3,675.82 |
| Take-home estimate | N/A | ~£58,849 |
The take-home figures differ by £6,360.93. But that is not the cost of being inside IR35, because the two columns do not leave the company in the same place: on the inside route the 5% allowance — £5,000, or £4,050 after corporation tax at 19% — stays in the company rather than reaching your pocket. Counting every tax on both sides gives the real answer:
| Outside IR35 | Inside IR35 (Chapter 8) | |
|---|---|---|
| Employer's NIC | £1,135.50 | £11,739.13 |
| Corporation tax | £19,118.04 | £950.00 (on the retained £5,000) |
| Income tax | £0.00 | £20,736.35 |
| Employee's NIC | £0.00 | £3,675.82 |
| Dividend tax | £14,536.83 | £0.00 |
| Total tax on £100,000 | £34,790.37 | £37,101.30 |
| Take-home | £65,209.63 | £58,848.70 |
| Retained in the company | £0.00 | £4,050.00 |
| Total value (take-home + reserves) | £65,209.63 | £62,898.70 |
On £100,000 of billing at 2026/27 rates, being inside IR35 costs approximately £2,310 more in tax — not the £6,360 that the take-home comparison suggests. If you then extract the retained £4,050 as a dividend at the 35.75% higher rate, the gap widens to about £3,759. Either way it is a meaningful annual cost, and it is worth knowing before you sign; it is not the five-figure catastrophe the headline comparison implies.
Two things this table does not capture, both favouring the outside position. Outside IR35 you can leave profit in the company and time dividends across tax years, keeping more of them in the 10.75% band instead of the 35.75% band — the full extraction modelled above pushes £29,476.46 of dividends into the higher rate, which good planning would avoid. And you retain access to the company's other flexibilities, including employer pension contributions. A deemed payment gives you none of that. So the practical gap is usually wider than £2,310, but through timing and planning rather than through the raw extraction arithmetic.
Notes on the calculation: the inside column applies the £5,000 employer's NIC secondary threshold to the deemed payment, which is why the employer's NIC is £11,739.13 rather than 15% of the full £95,000. Corporation tax on the outside route sits in the marginal relief band: £86,294.50 × 25% = £21,573.625, less marginal relief of (£250,000 − £86,294.50) × 3/200 = £2,455.5825, giving £19,118.04, an effective rate of 22.15%. Employer's NIC has been 15% above a £5,000 secondary threshold since April 2025; the change specific to 2026/27 is the 2 percentage point rise in dividend rates, which affects the outside column only.
Some contractors, upon receiving an inside SDS from a Chapter 10 client, simply carry on as if nothing has changed. This is a serious error. The fee payer must deduct tax from payments to your PSC under Chapter 10, so your invoices will be paid net whether you engage with the determination or not, and your accounts and self assessment need to reflect that correctly.
On earlier years, though, do not panic. HMRC has published a commitment (Employment Status Manual ESM10036) that it will not use information acquired as a result of the off-payroll reforms to open new compliance checks into tax years before 6 April 2021, unless it has reason to suspect fraud or other criminal behaviour — and that it will not ask for a 2020/21 SDS as evidence in an ongoing enquiry. An inside SDS today does not hand HMRC a retrospective case against your earlier Chapter 8 years. Where it can still matter is a client that has grown from small to medium or large: the same engagement may have sat under Chapter 8 in earlier years, and an inside view of it now is worth thinking through with your accountant rather than ignoring.
Two changes worth knowing about
Set-off relief from 6 April 2024
Before April 2024, when HMRC successfully challenged an outside determination the client or fee payer was assessed on the full PAYE and NIC due, with no credit for the corporation tax, dividend tax and income tax the contractor's company had already paid on the same income. The result was double taxation, and it made clients nervous enough to issue blanket inside determinations.
Since 6 April 2024, HMRC can set off income tax, NICs and corporation tax already paid by the worker and their intermediary against the deemed employer's PAYE liability. Note how the commencement actually works: the set-off can cover deemed direct payments going back to 6 April 2017 (public sector) or 6 April 2021 (medium and large private sector clients) — what must fall on or after 6 April 2024 is the trigger event, such as HMRC issuing a Regulation 80 determination. Cases closed before that date are not reopened.
It does not make an incorrect determination cost-free, but it materially reduces the exposure — and it undercuts the rationale for blanket bans on limited-company contractors.
Most commentary presents set-off as a win, and for clients it is. For contractors it cuts both ways. Before April 2024, if your engagement was reclassified as inside IR35, the client bore the full PAYE bill and you or your company could reclaim the corporation tax and dividend tax you had already paid on the same income. Under the set-off rules that refund is gone: the amounts are treated as having been recovered from you and your company, and the legislation specifically prevents a claim for repayment or relief in respect of them. The set-off is also HMRC's best estimate rather than a figure calculated from your returns. In short, the burden is now shared — and your share is the tax you have already paid, which you no longer get back.
The umbrella company rules from 6 April 2026
Separately from IR35, a new Chapter 11 of Part 2 of ITEPA 2003 (sections 61Y to 61Z1) took effect for payments made to umbrella company workers on or after 6 April 2026. It is worth being precise about what it does, because the announced policy and the enacted legislation are not the same thing. The Autumn Budget 2024 announcement suggested agencies would become responsible for operating PAYE on umbrella workers. What was legislated is narrower and different: joint and several liability.
Under Chapter 11 the umbrella company remains the employer and remains responsible for operating PAYE and Class 1 NIC as before. Layered on top, the agency with the direct contract with the end client — or the end client itself where there is no agency in the chain — is jointly and severally liable for any PAYE the umbrella fails to pay over. An umbrella that operates PAYE correctly never triggers liability for the agency above it; the rules bite when an umbrella collapses, disappears or simply does not pay HMRC what it has deducted.
One contrast with IR35 is worth noting, because it explains why agencies are reacting so strongly. Chapter 10 includes a reasonable care defence: a client that takes reasonable care and still gets a determination wrong can pass liability on. Chapter 11 has no equivalent — there is no statutory due diligence defence, so an agency can do everything right and still be liable if its umbrella fails. A separate regulatory regime for umbrella companies is expected to follow in 2027.
None of this applies to you if you work through your own limited company: Chapter 11 is about umbrella employment, not personal service companies. It matters because it changes agency behaviour — agencies now carry strict-liability risk on umbrella arrangements, which is already affecting which umbrellas they will work with and what options you are offered on an inside-IR35 engagement.
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-led status disagreement process. You make your representations to the client (or the fee payer) in writing, explaining why you believe the determination is incorrect. You can do this at any point up to the final payment under the engagement — there is no fixed deadline placed on you to raise it.
Once you raise a disagreement, the client has 45 days to respond — either issuing a new SDS or confirming the original determination with their reasons. If the client fails to respond within that 45-day window, responsibility for the tax deductions can pass to them. If they maintain the inside determination, you can accept it or pursue the matter further, and ultimately the position can be tested at the tax tribunal.
HMRC's Check Employment Status for Tax (CEST) tool is often used at this stage and is worth understanding rather than relying on. HMRC stands behind a CEST result only where the answers given accurately reflect the actual working practices — a result built on the contract wording alone protects nobody. CEST also returns "unable to determine" in a meaningful proportion of cases, and it has never modelled mutuality of obligation in the way the case law now requires. HMRC refreshed its Employment Status Manual through 2025 following the Supreme Court's decision in PGMOL. Treat CEST as a way of organising your evidence, not as a determination.
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:
- Use your right of substitution — if your contract allows it, actually use it where possible. Even one genuine substitution on record is powerful evidence.
- Work from home or your own premises where the engagement allows — reduced client-site presence reduces the control indicator.
- 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.
- Maintain multiple clients simultaneously where possible — exclusivity and long single-client engagements are among the strongest indicators against being in business on your own account, which is the stage most determinations now turn on.
- Get a proper contract review before signing — Qdos, IR35 Shield and Kingsbridge are among the established specialist reviewers. Expect to pay in the low hundreds of pounds for a contract-and-working-practices review, though you should check current pricing directly. We have no commercial relationship with any of them.
- 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 planned approach, once the practice is open: IR35 awareness briefings included in the Standard and Premium packages as standard, and a one-off written contract review (looking at your specific contract terms and working practices, with a reasoned risk summary) available as an add-on to any package. For complex or high-value contracts we will refer to specialist reviewers such as Qdos, IR35 Shield or Kingsbridge rather than stretch beyond what we can properly stand behind.
Questions about your specific contract?
IR35 awareness briefings are included in all Standard and Premium packages, with one-off written contract reviews available as an add-on and referrals to specialist reviewers for contracts that need a full assessment.
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