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What Is IR35?
IR35, formally known as the off-payroll working rules, is UK tax legislation designed to prevent “disguised employment,” where someone works through a personal service company (PSC) but functions, in practice, like an employee of the client they serve. It determines whether that contractor should pay broadly the same Income Tax and National Insurance as a direct employee.
IR35 assesses working reality, not contract wording. A contractor with a well-drafted “self-employed” agreement can still be caught if they take instructions, work fixed hours, and have no genuine right to send a substitute.
IR35 at a Glance
| Attribute | Description |
|---|---|
| Applies To | Contractors working through a personal service company (PSC) |
| Status Decided By | Medium/large private-sector clients and all public-sector clients |
| Small Company Exemption | Turnover under £15m, balance sheet under £7.5m, fewer than 50 employees (from April 2026) |
| Key Document | Status Determination Statement (SDS) |
| Consequence If “Inside” | PAYE and National Insurance are deducted at source |
| Best For | Understanding tax risk when engaging UK contractors via PSCs |
Why Does It Matter?
Getting IR35 status wrong carries real financial exposure. If a medium or large client misclassifies a contractor as “outside IR35” when they should be “inside,” HMRC can pursue the client for unpaid tax, National Insurance, interest, and penalties, sometimes going back several years. Since 2021, this responsibility sits with the engaging organisation, not the contractor, for most private-sector clients.
When Is It Used?
IR35 assessment becomes relevant whenever a company:
- Engages a UK-based contractor who operates through their own limited company.
- Needs to determine whether the engagement should be treated as employment for tax purposes.
- Reviews whether it qualifies for the small company exemption, following the April 2026 threshold changes.
A US software company engages a UK-based developer who invoices through their own limited company but works exclusively for the client, follows a fixed schedule, and has no right to send a substitute. Because the client is a medium-sized organisation, it must assess the engagement, issue a Status Determination Statement, and if the arrangement is “inside IR35,” ensure PAYE and National Insurance are deducted before payment.
Common Misconceptions
No. HMRC looks at the actual working relationship, including control, substitution rights, and mutuality of obligation, not just the corporate structure.
Not always. For medium and large private-sector clients, and all public-sector clients, the engaging organisation is responsible for the determination.
Not entirely. Small companies are exempt from making the determination, but the contractor's own PSC still must assess and apply IR35 correctly.
No. Because company size is assessed using prior-year accounts, most practical effects won't be felt until April 2027 at the earliest.
IR35 determines whether a contractor working through a personal service company should be taxed like an employee, based on how the engagement actually operates. Companies engaging UK contractors need a clear, documented assessment process, since misclassification risk and liability generally sit with the client, not the contractor.
Engaging UK contractors?
We'll help you assess IR35 status, issue Status Determination Statements, and stay clear of misclassification liability.
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