Key points
- IR35 applies when you work through your own company (or another intermediary, such as a partnership), but the relationship with the client looks like employment. Then tax is due much as if you were employed.
- HMRC looks at control, a genuine right of substitution, and whether you are in business on your own account. It looks at how you really work, not only at the contract.
- Public bodies, and medium or large private clients with a UK connection, decide your status in a Status Determination Statement. For small or wholly overseas clients, your own company decides.
- For 2026/27, client size in practice still turns on the old limits: turnover over £10.2 million, balance sheet over £5.1 million, more than 50 employees. The new £15 million and £7.5 million limits affect 2027/28 at the earliest.
- You can challenge a client's decision. The client must reply within 45 days.
- HMRC can normally go back 4 years, 6 if careless and 20 if deliberate. Protect yourself with a clear contract, the HMRC CEST check, and records of how you actually work.
What is IR35 in the UK?
IR35 is the name for UK tax rules that apply when someone works for a client through their own limited company or another intermediary. They have applied across Great Britain and Northern Ireland since 2000. If the person would be an employee were they engaged directly, Income Tax and National Insurance are due broadly as if they were employed.
Since April 2017 for public bodies, and April 2021 for medium and large private and voluntary sector clients, a second set of rules applies: the off-payroll working rules. They move the decision, and the tax deduction, to the client or agency. People still call both sets of rules "IR35".
Meet Bob: an IR35 example
Bob is a made-up example. He is a web developer who goes freelance, sets up his own limited company and lands two projects. Then he hears about IR35, and wonders whether it changes the tax on his fees.
Bob at MegaCorp
- Detailed project plan, set hours, a company laptop.
- Told when, where and how to work.
- Looks like an employee: likely inside IR35.
Bob at SmallBiz
- Creative freedom, his own hours and equipment.
- Works on other projects at the same time.
- Looks like a real business: likely outside IR35.
What you lose if you are inside IR35
If Bob's contract is inside IR35, most of the tax advantage of working through his company falls away for that contract. Fees from the engagement are taxed broadly like a salary, with Income Tax and both employee and employer National Insurance, rather than being taken as a smaller salary plus dividends.
Who deals with it depends on the client. Where the client decides status, the deemed employer deducts the tax before paying Bob's company. Where Bob's own company decides, it works out a deemed employment payment at the end of the tax year.
IR35 tests: control, substitution and mutuality of obligation
- ControlHow much say does the client have over how, when and where the work is done? Detailed instructions are a red flag.
- Substitution (right of replacement)A substitution clause, sometimes called a right of replacement, lets your company send someone else, such as another qualified developer, to do the work instead of you. HMRC gives it weight only if it is genuine. A right the client would never accept in practice, or one that depends entirely on the client's approval, counts for little. A clause that does not reflect reality can be disregarded. If you have actually sent a substitute, keep evidence of it.
- Mutuality of obligationThis is the basic exchange of personal work for pay. HMRC's view, following the Supreme Court, is that once you are doing work and being paid for it, this exchange is present. So it rarely decides a case on its own.
What usually matters more is control, a genuine right of substitution, and whether you are in business on your own account. Other factors count too: whose equipment you use, whether you carry financial risk, whether you work for several clients, whether you are free to turn work down, whether you are part of the client's organisation, and how long the engagement lasts.
Who decides your IR35 status?
| Client | Who decides | Who pays the tax if inside |
|---|---|---|
| Any public body, or a medium or large private or voluntary sector client with a UK connection | The client, in a Status Determination Statement | The deemed employer (the client or the agency that pays your company) deducts tax and National Insurance, and pays employer National Insurance and the Apprenticeship Levy |
| Small private sector client | Your own company | Your company, through a deemed payment at the year end |
| Client is not UK resident and has no UK permanent establishment | Your own company | Your company, through a deemed payment at the year end |
Is my client small for IR35 in 2026/27?
A private sector company is medium or large if, for two financial years in a row, it meets at least two of these: turnover over £10.2 million, balance sheet total over £5.1 million, more than 50 employees. The year that counts is the last financial year whose deadline for filing accounts fell before the tax year starts.
The turnover and balance sheet limits rose to £15 million and £7.5 million for financial years beginning on or after 6 April 2025. The employee limit stays at 50. Because the test looks back at filed accounts, HMRC says the earliest tax year the new limits can affect is 2027/28. So for 2026/27, the old £10.2 million and £5.1 million limits apply in practice.
A client that is not a company, such as a partnership, is medium or large if its turnover is over £10.2 million. The new limits do not apply to it. A partnership or other undertaking looks at its last financial year that ended at least 9 months before the tax year. An individual looks at the last calendar year.
Public bodies apply the rules whatever their size. A small client must tell you its size if you ask.
Status determination statement: how to challenge it
A medium or large client, or a public body, must give you a Status Determination Statement. It sets out the client's conclusion and the reasons for it, and the client must take reasonable care in reaching it. The client must pass it to you and to the next party in the chain, on or before the first payment. If it does not, the client stays liable for the tax.
If you disagree, tell the client in writing and explain why. The client must reply within 45 days, either confirming its decision with reasons or issuing a new statement. If it does not reply in time, it becomes liable for the tax and National Insurance on later payments. Keep the statement and all correspondence.
If you are inside the rules, the deemed employer does not deduct student or postgraduate loan repayments. You pay them through Self Assessment.
The deemed payment for small clients
If your company decides a contract is inside IR35 (small or wholly overseas clients), it works out a deemed employment payment for the tax year. In outline, it takes what it received for the contract and deducts:
- a flat 5% allowance;
- allowable expenses;
- pension contributions;
- salary already paid to you.
The balance, after employer National Insurance, is treated as extra salary paid to you on 5 April. Your company reports it on a Full Payment Submission on or before 5 April and pays the tax through PAYE. If nothing is left after the deductions, no extra tax is due, but keep the calculation.
No double taxation: the April 2024 offset
Since 6 April 2024, if HMRC finds that a client or agency should have deducted tax under the off-payroll rules, it can reduce what the deemed employer owes by the tax and National Insurance already paid by the worker and their company on the same income. The worker and the company cannot then also reclaim or reuse that tax.
HMRC IR35 investigations, time limits and penalties
HMRC can open a compliance check into a contractor's company, a client or an agency. It can ask for contracts, invoices and evidence of how the work was actually done.
- Time limits. HMRC can normally assess tax for up to 4 years back, 6 years if the underpayment was careless, and 20 years if it was deliberate.
- Interest. Interest is charged on late tax.
- Penalties. Penalties for inaccuracies can reach 30% of the extra tax for careless errors, 70% for deliberate ones, and 100% where they were also concealed. There is no penalty if you took reasonable care.
HMRC does not publish what prompts an IR35 check. The best protection is a clear contract, working practices that match it, and records.
How to protect your business
- A professional contract reviewA specialist spots clauses that look like employment and helps you renegotiate them before you start.
- IR35 insurancePolicies differ. Read what is covered, for example professional fees if HMRC opens an enquiry, before you buy. We do not recommend or arrange insurance.
- HMRC's CEST toolFree. HMRC stands by the result as long as your answers are accurate and stay accurate, and the arrangement is not contrived. Run it again if the work changes. It can also say it cannot decide. Save the result: CEST keeps no record.
- A working practices diaryRecord when you turned work down, used your own equipment, or worked for several clients at once.
- A contract for resultsNot "help with marketing", but "deliver a new website by 1 December", with a genuine right to send a substitute and use your own tools.
Together they work like a belt and braces: the review finds the risks, CEST gives a view HMRC stands by if your answers are accurate, the diary supports your case, and the contract sets the rules.
IR35 for overseas contractors and clients
Three things decide whether the rules reach you.
- Would you pay UK tax on this work if you were employed directly?If you are UK resident, you are taxed on your earnings wherever you work, so the rules follow you abroad. If you are not UK resident, work you do in the UK is normally within UK tax, apart from brief visits. Work you do wholly outside the UK usually is not.
- Where is the client?If the client is not UK resident and has no permanent establishment in the UK, the off-payroll rules do not apply. Your own company must check IR35 itself.
- Where is your company?The place where your company is registered makes no difference.
National Insurance can differ, for example if you hold an A1 or similar certificate. Other countries may have their own rules. Read foreign income.
CIS and IR35 in construction
The Construction Industry Scheme deducts tax from payments to subcontractors. IR35 asks a different question: is the relationship really employment? Being registered for CIS does not protect you.
The off-payroll rules are considered first. If they apply, CIS does not need to be considered for that payment. If they do not apply, the client must still consider CIS deductions. For small clients, your company decides IR35, and the client still considers CIS.
Quick IR35 self-check
A rough first indication only. HMRC looks at the whole picture. Its CEST tool gives a result HMRC stands by, as long as your answers are accurate and stay accurate and the arrangement is not contrived.
What to prepare
0 of 6 ready
One piece of advice
IR35 is not only about getting the paperwork right. Make sure the way you actually work matches what the contract says, because HMRC looks at the real situation, not just the paper.
Test yourself
1. Who decides IR35 status when you work for a large UK company?
Medium and large clients with a UK connection must issue a Status Determination Statement.
2. A UK company has £12 million turnover, a £4 million balance sheet and 30 employees, in both of its last two relevant years. For 2026/27 it is:
It meets only one of the three conditions (turnover over £10.2 million). It needs two.
3. Which is a sign of being outside IR35?
A genuine right of substitution points to a business.
4. You disagree with the client's Status Determination Statement. How long does the client have to reply?
If the client does not reply within 45 days, it becomes liable for the tax on later payments.
5. How far back can HMRC normally assess tax if an error was careless?
4 years normally, 6 if careless, 20 if deliberate.
6. Does CIS registration protect a builder from IR35?
HMRC can apply IR35 or the off-payroll rules regardless of CIS.
7. Will HMRC stand by a CEST result?
HMRC stands by it while the information remains accurate and the arrangement is not contrived. Save the result.
Law and sources
- GOV.UK: understanding off-payroll working (IR35)The rules, intermediaries and student loans
- GOV.UK: off-payroll working for clientsClient size, status determination statements
- GOV.UK: off-payroll working for small clientsWhen your own company decides
- GOV.UK: Check employment status for tax (CEST)HMRC's free status tool
- Income Tax (Earnings and Pensions) Act 2003, Part 2, Chapters 8 and 10The intermediaries legislation
- HMRC Employment Status Manual ESM0500Guide to determining status
- HMRC Employment Status Manual ESM0543Mutuality of obligation
- HMRC Employment Status Manual ESM10006 and ESM10006ASmall client test and the April 2025 limits
- HMRC Employment Status Manual ESM10015The 45-day disagreement process
- HMRC Employment Status Manual ESM10025Residence and overseas clients
- HMRC Employment Status Manual ESM10037The offset from April 2024
- HMRC Employment Status Manual ESM8140The deemed employment payment
- HMRC Compliance Handbook CH51300Time limits for assessments
- HMRC factsheet CC/FS7aPenalties for inaccuracies
- Companies Act 2006, section 382The small company test
This guide explains the rules in general terms as at 9 October 2026. It is not advice for your situation. Rules and rates change.
