What IR35 is, in plain English
IR35 is the UK tax rule that asks a single question about a contractor working through a limited company: if you took the company out of the picture, would the relationship between you and the client look like employment? If the answer is yes, the rules treat the income as employment income and tax it broadly the way a salary is taxed, removing the advantage of routing employment-style work through a personal service company.
The name comes from Inland Revenue press release number 35, published in March 1999. The rules took effect from 6 April 2000 and now live in Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). HMRC's underlying concern is consistency: an employee and a contractor doing the same work for the same client should not pay very different amounts of tax simply because one of them invoices through a company.
The phrase people reach for is "disguised employee". That is the target of the legislation: someone who is, in substance, an employee, but who is paid through an intermediary so that part of the income can come out as dividends rather than salary. IR35 does not catch genuine businesses. It catches arrangements that are employment in all but legal form.
One point colours everything that follows. Status is decided on the actual working relationship, not on the words in the contract alone. HMRC and the tribunals can and do look past helpful drafting to how the engagement really operates. That is why a contract review on its own is never enough, and why documenting how you genuinely work matters as much as what the paperwork says.
It also helps to be clear about what is actually at stake. IR35 does not change whether you can use a limited company, and it does not make contracting through a company wrong. What it changes is how the income from a particular engagement is taxed. Outside IR35, your company is paid gross and you extract profit through a mix of salary and dividends in the normal way. Inside IR35, that same income is taxed broadly as if it were employment earnings, which removes most of the efficiency of the company structure for that piece of work. The rules bite engagement by engagement, so it is entirely possible to hold one contract that is outside and another that is inside at the same time.
One topic, two regimes: Chapter 8 and Chapter 10
"IR35" loosely means the whole subject, but precisely it covers two separate regimes that sit side by side in Part 2 of ITEPA 2003. They ask the same status question. They differ on who decides and who pays. Getting this distinction right is the single most useful thing a contractor can understand, because it determines where the responsibility, and the risk, actually sits.
Chapter 8: the original IR35 (company decides and pays)
Chapter 8 (sections 48 to 61 of ITEPA 2003) is the original intermediaries legislation, in force since 6 April 2000. Where it applies, your own company assesses its status. If the engagement is inside IR35, the company itself calculates and operates a deemed employment payment on its own account at the year end, accounting for the resulting income tax and National Insurance. The decision, and the liability, rest with the personal service company.
Chapter 10: the off-payroll working rules (client decides, fee-payer pays)
Chapter 10 (sections 61K to 61X) is the off-payroll working reform. It applied to public sector engagements from 6 April 2017 and was extended to medium and large private-sector clients from 6 April 2021. Here the end client determines status and issues a Status Determination Statement, and the fee-payer (usually the agency closest to your company) operates PAYE and National Insurance before paying your company. The decision moves to the client, and the tax operation moves to the fee-payer. The mechanics of this chain, the fee-payer, debt transfer and set-off, are covered in our guide to the off-payroll working rules in the private sector.
The clean way to hold the two regimes in your head: Chapter 8, the company decides and pays; Chapter 10, the client decides and the fee-payer pays. Do not assume a contractor always decides their own status. That is only true under Chapter 8, which now applies to small or wholly overseas clients.
The table below summarises the practical differences. The status question is identical in both columns; everything else flows from who is in the chair.
| Chapter 8 (original IR35) | Chapter 10 (off-payroll working) | |
|---|---|---|
| When it applies | Small or wholly overseas end client | Medium or large end client |
| Who decides status | Your own company | The end client (issues an SDS) |
| Who operates the tax if inside | Your own company, via a year-end deemed payment | The fee-payer (usually the agency), via PAYE |
| Where the risk sits | Your company | The client and fee-payer chain |
| 5% expenses allowance | Retained | Abolished |
| In force from | 6 April 2000 | 6 April 2017 (public), 6 April 2021 (private) |
This is also why a contractor cannot simply pick the regime they prefer. You do not opt into Chapter 8 or Chapter 10. The size of the client decides it for you, and the responsibility follows automatically.
Which regime applies to you? It comes down to client size
The dividing line between the two regimes is the size of the end client. If the client is small, or is wholly overseas with no UK connection, Chapter 10 does not apply and the decision stays with your company under Chapter 8. If the client is medium or large, Chapter 10 applies and the client must decide.
"Small" is defined by reference to the Companies Act 2006 small-company conditions, imported into the off-payroll rules by ITEPA section 60A. A company is small for a financial year if it meets two or more of three conditions. For financial years beginning on or after 6 April 2025 those thresholds were raised by roughly half:
| Condition | Threshold (financial years beginning on or after 6 April 2025) |
|---|---|
| Annual turnover | Not more than £15m (previously £10.2m) |
| Balance sheet total | Not more than £7.5m (previously £5.1m) |
| Number of employees | Not more than 50 (unchanged) |
A company normally has to meet, or cease to meet, these conditions in two consecutive financial years before its status changes. There is also a timing lag: a client's off-payroll obligation for a given tax year is set by reference to its last financial year that ended before the start of that tax year, with enough time to file.
This matters because the threshold rise does not take clients out of scope immediately. Putting the two-consecutive-years rule together with the filing lag, the earliest a previously medium client can drop out of Chapter 10 on the back of the higher thresholds is 6 April 2027, and for many year-ends 6 April 2028. So for 2026/27, treat your medium and large clients as still in scope unless the client has confirmed otherwise. There is a fuller walkthrough in our guide to the small-company exemption.
For non-corporate clients (LLPs, partnerships and unincorporated bodies) a separate, turnover-based test applies rather than the three-condition test above. If you are unsure which side of the line your client sits, that is exactly the kind of question to put to a specialist.
The three tests that decide your status
There is no statutory definition of employment for tax. Status rests on a multi-factorial test drawn from case law, with its roots in Ready Mixed Concrete (South East) Ltd v Minister of Pensions [1968] 2 QB 497. That case set out an irreducible minimum: personal service, a sufficient degree of control, and terms consistent with a contract of service. Three tests carry the most weight, but none is decisive on its own.
Personal service and the right of substitution
Can you send someone else to do the work in your place? A genuine and unfettered right to send a substitute, where you pay the substitute yourself and the client cannot unreasonably refuse, is one of the strongest pointers away from employment, because an employee must personally turn up. A clause that lets the client veto any substitute, or one that has never been used and never could be, carries little weight. The reality counts more than the wording: a substitution clause only helps if it reflects how the engagement could actually operate.
Control
Does the client control how you do the work, not just what the end result should be? The more the client directs the method, the hours, the place and the day-to-day approach, line-managing you like a member of staff, the more employment-like the relationship looks. Genuine professional autonomy, where you are told the outcome required and left to decide how to deliver it, points towards being in business on your own account.
Mutuality of obligation
Is there an ongoing obligation on the client to offer you work and on you to accept it, beyond the basic bargain of pay for work done? In an employment relationship the employer keeps finding work and the employee keeps doing it. A genuine contractor engagement ends when the project ends, with no expectation of more. This test was refined by the Supreme Court in Professional Game Match Officials Ltd v HMRC [2024] UKSC 29 (PGMOL), which held that mutuality of obligation can exist within a single engagement, so the lack of an obligation between assignments does not by itself put you outside. Mutuality is necessary, but not decisive.
The whole picture governs
Modern appellate authority, including Atholl House [2022] EWCA Civ 501, Kickabout [2022] EWCA Civ 502 and PGMOL, confirms that control and mutuality are necessary preconditions but not sufficient. Even where both are present, a tribunal must stand back and ask, on the whole picture, whether the hypothetical contract is one of employment, including whether you are genuinely in business on your own account. So no single clause, and no single factor, settles your status.
Several other features feed into that whole-picture judgement once the three main tests have been weighed. Financial risk is one: an employee is paid whatever happens, while a business that has to put right defective work at its own cost, invests in its own equipment, or stands to make a profit or loss on the engagement, looks more like a genuine contractor. Integration is another: someone embedded in the client's organisation, with a permanent desk, a staff pass, line-management responsibilities and an entry in the internal directory, looks more like part of the workforce than a supplier brought in for a defined piece of work. None of these is decisive in isolation, and the courts are explicit that the exercise is qualitative, not a points score.
This is why two contractors on apparently similar contracts can end up on opposite sides of the line. The wording can be identical, but if one genuinely sends substitutes, carries professional indemnity cover, works for several clients and is free to decline work, while the other sits in a fixed seat under daily direction with no real autonomy, the whole picture differs. The lesson the case law keeps returning to is the same: working practices over wording. A clause is only worth the reality behind it. Our guide to building an outside IR35 position goes further into how these tests play out in practice and how to evidence them.
Who actually makes the determination
Under Chapter 8 (small or wholly overseas clients), your own company makes the determination and is responsible for any deemed payment. Under Chapter 10 (medium and large clients), the end client must do it, through a formal document.
The Status Determination Statement
For each Chapter 10 engagement the end client must issue a Status Determination Statement (SDS): its conclusion, inside or outside IR35, with the reasons for it, reached with reasonable care. The client must pass the SDS to you and to the next party down the chain, normally the agency or fee-payer. The reasoning matters, not just the conclusion. A statement that simply asserts a result without engaging with the specific engagement may not be valid.
Two consequences follow from getting an SDS wrong. First, if the client does not take reasonable care, the statement is invalid and the client itself becomes the deemed employer liable for the PAYE and National Insurance, even where an agency sits below it. Second, if the client fails to pass the SDS down the chain, the liability stays with the client until it does. The full SDS mechanics are covered in our dedicated guide to the Status Determination Statement.
Blanket determinations are a red flag
A client that issues a single "inside IR35" determination across a whole category of contractors, without assessing each engagement individually, is very likely failing the reasonable-care requirement. Our position is that blanket determinations are bad practice and legally risky for the client, and that a contractor faced with one has a strong basis to use the disagreement process below.
Your right to disagree
A worker who disagrees with an SDS can use the client-led disagreement process. You put your representations to the client in writing, explaining why you believe the determination is wrong. The client must consider them and respond within 45 days, either confirming the SDS with reasons or issuing a new one. It is client-led, meaning the client makes the final call, but it must respond and give reasons within that window. The most persuasive evidence is about your real working practices: a substitution you actually offered or sent, a clear project scope that ended when the deliverable was done, your own equipment, and work for other clients in the same period.
What "inside" means, in outline
If an engagement is found to be inside IR35, what happens to the income depends on which regime applies. The detailed take-home impact, and what you can still claim, is the subject of our inside IR35 guide, but here is the outline.
Under Chapter 10, the fee-payer treats the payment to your company, after deducting any VAT and the direct cost of materials, as a deemed direct payment. It operates PAYE and employee Class 1 National Insurance, and pays employer Class 1 National Insurance at 15% (2026/27) on top, before paying the net amount to your company. There is no 5% expenses allowance under Chapter 10. A point many contractors miss is that the employer National Insurance comes out of the assignment rate, it is not added on top, so the headline day rate overstates what reaches you.
Under Chapter 8, your own company computes the deemed employment payment at year end. Here the 5% allowance is retained: the calculation starts from the relevant engagement income and deducts a flat 5% for administrative expenses, along with actual allowable expenses, employer pension contributions and any salary already paid through PAYE, before grossing down for employer National Insurance. The 5% allowance is the headline difference between the two regimes: it exists under Chapter 8 and is gone under Chapter 10. Do not assume it is available on a Chapter 10 engagement.
Since 6 April 2024 an offset reduces the double-taxation that used to follow an incorrect "outside" determination: HMRC credits the deemed employer's liability with tax the worker and company already paid on the same income. The offset reduces the exposure but does not eliminate it, because it does not refund employer National Insurance, which was never paid in the first place.
It is worth being concrete about the direction of travel. The reason an inside determination matters so much is the stacking of charges on the same income. The fee-payer takes employer National Insurance out of the assignment rate at 15% (2026/27), then operates PAYE income tax at the relevant band rates (20%, 40% or 45% for rUK in 2026/27) and employee National Insurance at 8% up to the upper earnings limit and 2% above it. By contrast, an outside engagement leaves the profit to be taxed once in the company (corporation tax of 19% on profits up to £50,000, rising through a marginal band to 25%) and then, on extraction, at dividend rates of 10.75% or 35.75% for 2026/27. The detailed take-home comparison belongs in our guide to being inside IR35, but the headline is that an inside finding can reduce net pay on the same day rate by a meaningful margin, which is exactly why the determination is worth getting right and worth challenging when it is wrong.
CEST: useful, but never a guarantee
HMRC publishes a free online tool, Check Employment Status for Tax (CEST), updated on 30 April 2025 with a dedicated mutuality-of-obligation question and an upfront "is there a contract" gate. HMRC says it will stand behind a CEST result where the inputs are accurate, consistent with the actual working practices, in line with the guidance, and there is no avoidance.
Treat that promise with care. CEST is a useful first screen and audit-trail document, but it has real limits. It does not bind a tribunal. It is only as good as the answers you feed it, so a result that does not match how you actually work is worthless. And its treatment of mutuality of obligation is narrower than the case law, so it can return "outside", or refuse to decide, on facts a tribunal might view differently. Never treat a CEST "outside" result as a guarantee. Use it as supporting evidence, backed by a proper contract review and an honest assessment of your working practices.
What IR35 is not
Two regimes are often confused with IR35 and are worth separating out.
The Managed Service Company (MSC) legislation (Chapter 9 of Part 2 ITEPA 2003) is a separate risk that does not depend on a status test at all. It can apply where an "MSC provider" goes beyond advice into influencing or controlling how a contractor's company is run and how the worker is paid, and it carries personal debt transfer. A genuine independent accountant who advises, leaving the client to make the decisions, stays on the safe side of the carve-out in section 61B(3). This is one reason the choice of accountant matters as a risk-management decision, not just a price decision.
The umbrella company route is also not IR35. An umbrella employs you directly and runs PAYE on your assignment income, so there is no personal service company for the rules to test. Umbrellas are the common route for inside-IR35 or low-margin work. From 6 April 2026, a new joint-and-several-liability rule (Finance Act 2026 section 24, inserting Chapter 11 into ITEPA 2003) makes the agency that contracts with the end client, or the end client where there is no agency, jointly and severally liable with the umbrella for any PAYE the umbrella fails to remit, although the umbrella stays the legal employer. The choice between running a company and using an umbrella turns on your mix of inside and outside work rather than on a blanket rule that one is always better.
A practical position to take in 2026/27
The dividend rates that make a personal service company attractive rose on 6 April 2026 (ordinary to 10.75%, upper to 35.75%), so the gap between outside-IR35 contracting and employment has narrowed, but for genuine business arrangements the company route still has real advantages, not least pensions and retained profit. The right approach is to get your status right and to be able to evidence it, rather than to lean on contract wording or a single CEST run.
Three situations cover most contractors. Starting a new engagement is the moment to have the contract reviewed by a specialist and to check that the way you will actually work supports an outside position, because the working practices are where a position is won or lost. Receiving an SDS you disagree with, especially a blanket one applied across a whole category of roles, is the cue to use the client-led disagreement process and to assemble your working-practices evidence inside the 45-day window. Already being on an inside engagement is the point to weigh whether a company or an umbrella is the simpler route for that particular work, while remembering that from April 2026 umbrella compliance, not company structure, is the bigger thing to watch.
Whichever situation you are in, the principle is the same. Get the status right on the facts, evidence it, and avoid leaning on a single CEST run or a tidy clause. Status is not a one-off decision either: working practices drift over time, engagements roll on past their original scope, and a position that was comfortably outside at the start can weaken as the months pass, so it is worth reviewing periodically rather than filing and forgetting.
For a plain-English read on where you stand, our team reviews contracts and working arrangements every day. You can use our IR35 status service for a structured assessment, see the full range on our services page, or get in touch to talk it through.