IR35 is shorthand for the off-payroll working rules — legislation designed to ensure that contractors who are, in substance, working like employees pay broadly the same tax as employees. The rules apply when a contractor provides services through an intermediary (almost always a personal service company, or PSC) but would have been classed as an employee had they been engaged directly.

For many contractors, IR35 changes explained clearly is harder to find than it should be. The legislation has been amended several times since its original introduction in 2000, most significantly with the extension of responsibility to private sector clients in April 2021. Two further rounds of changes — in April 2025 and April 2026 — mean the landscape is shifting again, affecting both contractors and the businesses that hire them.

This guide sets out the core rules, the three employment status tests that determine whether IR35 applies, what has changed recently, and where the practical risks sit for contractors and engagers alike.

The off-payroll rules apply on a contract-by-contract basis. Each engagement a contractor takes on is assessed independently, which means a contractor can legitimately sit inside IR35 on one contract while being outside it on another running at the same time.

Who determines employment status?

For large and medium-sized private sector clients, the responsibility for making a status determination sits with the end client — the business receiving the contractor’s services. Once the determination is made, the client must issue a Status Determination Statement (SDS) to the contractor and the agency (if one is involved in the supply chain).

For small clients (see the updated thresholds below), the responsibility remains with the contractor’s own company to self-assess. This is the regime that existed for the entire private sector before April 2021.

What happens if a contractor is inside IR35?

Where a contract is determined to be inside IR35, the ‘deemed employer’ in the chain — usually the agency or the end client — must deduct Income Tax and employee National Insurance contributions through PAYE before paying the contractor’s company. One point worth noting: student loan repayments and postgraduate loan repayments are not deducted under this mechanism, even where they would normally apply.

The CEST tool

HMRC offers a free online tool called Check Employment Status for Tax (CEST) to assist with status determinations. It is not infallible — there have been well-documented cases where its output has been challenged — but HMRC will stand behind a CEST result provided the information entered is accurate and the tool is used in good faith. For most straightforward engagements it is a reasonable starting point, though complex cases warrant more careful review.

Whether a contractor sits inside or outside IR35 comes down to the nature of the working relationship, assessed through three primary tests. Courts and tribunals have considered these at length, and the weighting between them can shift depending on the facts of each case.

Control

The first question is how much control the client has over the contractor’s work — specifically, what is done, how it is done, when it is done, and where. A contractor who turns up at 9am because the client says so, uses the client’s systems and methods, and has no real say over how the work is carried out looks much more like an employee than a genuinely independent consultant who determines their own approach.

Control does not need to be exercised constantly to be relevant — the right of control matters as much as its day-to-day exercise.

Substitution

Can the contractor send someone else to do the work in their place without the client’s agreement being required? A genuine right of substitution — one that exists in practice, not just on paper — is one of the strongest indicators of self-employment. Where contracts include a substitution clause but the client would, realistically, never accept a substitute, HMRC and tribunals tend to look through the wording to the reality.

Mutuality of obligation

This test asks whether there is a mutual obligation between the parties: is the client obliged to offer work, and is the contractor obliged to accept it? Employees typically have this mutual commitment. A contractor engaged for a defined project with no expectation of further work being offered or accepted sits much more comfortably outside IR35 on this test.

No single test is automatically decisive. The overall picture of the working relationship — sometimes described as ‘the totality of the circumstances’ — is what matters.

From April 2025, the definition of a ‘small company’ for IR35 purposes was updated following a general increase in the Companies Act small company thresholds. The new tests are:

• Annual turnover not exceeding £15 million (up from £10.2 million)
• Balance sheet total not exceeding £7.5 million (up from £5.1 million)
• No more than 50 employees (unchanged)

To qualify as small, a company must meet at least two of these three conditions. HMRC estimated that around 14,000 businesses moved from the medium or large category into the small category as a result of this change — meaning they are no longer responsible for making IR35 determinations on contractors they engage. That responsibility reverts to the contractor’s own company for those engagements.

The offset change that also took effect in April 2025

Also from April 2025, HMRC introduced an offset mechanism to address a long-standing criticism of how IR35 liabilities were calculated. Previously, if a contractor was found to be inside IR35 and a liability arose, HMRC would assess the deemed employer without taking into account tax already paid by the contractor’s company on the same income — creating the potential for double taxation.

Under the updated rules, HMRC will now offset tax already paid by the contractor’s company (Corporation Tax on profits, Income Tax on dividends, and so on) when calculating the outstanding liability. This does not eliminate all IR35 risk, but it removes one of the more significant injustices in how the rules previously operated. It applies to determinations made after 6 April 2025.

If you operate through a PSC and have historic periods where your status was uncertain, this change is worth understanding — and worth discussing with an adviser if a compliance review is on the horizon.

The April 2026 changes do not alter the IR35 rules directly, but they are closely connected and affect a large part of the contractor market. Many contractors who work through agencies are paid via umbrella companies rather than their own PSC. From 6 April 2026, the responsibility for ensuring PAYE is operated correctly in these arrangements shifted significantly up the supply chain.

Who is now responsible?

Under the new rules, where a worker is supplied to an end client via a recruitment agency and an umbrella company, the agency becomes responsible for accounting for PAYE and Class 1 National Insurance on payments made to workers from that date. Where there is no agency in the chain, the responsibility falls to the end client directly.

This is a significant shift. Previously, if an umbrella company failed to account for PAYE correctly — whether through incompetence or deliberate non-compliance — HMRC’s primary recovery route was against the umbrella itself. In practice, non-compliant umbrella companies often dissolved and reformed, leaving workers with unexpected tax bills and compliant operators at a commercial disadvantage. The new rules allow HMRC to recover unpaid amounts from the agency or end client instead.

What this means in practice

Agencies working with umbrella companies need to carry out due diligence on the umbrella operators they use, since they now bear the financial risk if those operators fail. End clients engaging workers via agencies should understand where liability sits in their specific supply chain.

These rules apply to payments made on or after 6 April 2026. They do not apply where a worker is engaged through their own personal service company and the standard IR35 rules apply instead.

HMRC has stated it uses real-time data to identify workers who may have entered arrangements that do not comply with the rules, and typically issues warnings within two months. Workers who receive such a warning should act quickly.

For large and medium-sized clients, issuing a Status Determination Statement is not optional. The SDS must set out the client’s conclusion on whether IR35 applies to the particular engagement, and the reasons for reaching that conclusion. Without a valid SDS, the client becomes the deemed employer by default — meaning the liability for any unpaid PAYE and NICs falls on them rather than further down the chain.

What a valid SDS must include

There is no prescribed form for an SDS, but it must:

• State the client’s conclusion on employment status (inside or outside IR35)
• Set out the reasons for that conclusion in enough detail that the contractor can meaningfully challenge it if they disagree
• Be provided to the contractor and to the agency (if one exists) before or at the point the contractor starts work

Source data from industry commentary suggests a 45-day window is referenced in some guidance for providing the SDS. In practice, the safer position is to complete the determination before the engagement begins rather than after the contractor is already on-site.

The disagreement process

Contractors and agencies have the right to challenge an SDS they disagree with. The client is required to consider the challenge and respond within 45 days. Critically, if the client fails to respond within that window, the liability moves back to them. This is a procedural protection worth knowing about — but using it constructively, through genuine dialogue, tends to produce better outcomes than treating it as a gotcha.

If you operate through your own personal service company and your client qualifies as small, you are responsible for assessing your own IR35 status for each contract. That responsibility has always existed for small client engagements; the changes since 2021 simply mean it no longer applies to all private sector clients.

Reviewing your contracts

The written contract matters, but tribunals consistently look beyond the paper to how the engagement actually operates. A contract that ticks every ‘outside IR35’ box on paper but describes work that is, in reality, wholly controlled by the client, carries significant risk. Contracts should be reviewed by someone who understands both the legal language and the practical tests — ideally before the engagement begins, not after it has run for a year.

Record-keeping and evidence

If HMRC opens an enquiry into your employment status, the quality of your records can be the difference between a successful defence and a costly settlement. Keep copies of all contracts, invoices, correspondence about the scope of work, and any evidence that demonstrates the contractor relationship in practice — substitution arrangements that were actually used, for example, or records of concurrent engagements.

When the risk increases

Long-term, single-client engagements attract scrutiny. If you have been providing services to the same client for several years, under rolling short-term contracts, with no meaningful right of substitution, that pattern is exactly what IR35 was designed to address. That does not mean it is automatically inside IR35, but it does mean the case needs to be made clearly and backed by evidence.

Whether you are a contractor reassessing your status or a business client working through your SDS obligations, these steps set out a sensible sequence to follow.

These are the errors that come up repeatedly in practice, often because contractors or clients are working from outdated or oversimplified information.