IR35 Explained: The Off-Payroll Working Rules for UK Clients

IR35, now called the off-payroll working rules, makes a contractor working through their own company pay broadly the same tax and National Insurance as an employee, if they’d be an employee when working directly for the client. In the public sector and at medium or large private clients, the client decides status and the deemed employer runs PAYE.

This guide is for the client, the business engaging the contractor. It’s based on HMRC’s guidance on understanding off-payroll working and off-payroll working for clients.

When do the off-payroll working rules apply?

The rules apply when a worker provides services to a client through their own intermediary. That’s usually a limited company, often called a personal service company (PSC), but it can also be a partnership or another individual. The question is whether the worker would have been an employee if they’d been engaged directly.

The rules apply contract by contract. The same contractor can be inside the rules on one engagement and outside on another. A contract can be written, verbal or implied.

They’re unlikely to apply if the worker is employed by an umbrella company. They also don’t apply to a fully contracted-out service, where the responsibility sits with the service provider. HMRC warns against relabelling contracts to avoid the rules.

Who decides IR35 status: the client or the contractor?

Client	Who decides status	Who operates PAYE if inside
Public authority	Client	Deemed employer (client or agency)
Medium or large private or voluntary sector	Client	Deemed employer (client or agency)
Small private or voluntary sector	Contractor’s own company	Contractor’s own company
Wholly overseas with no UK connection	Contractor’s own company	Contractor’s own company

A client is “overseas” only if it has no UK connection. Being UK resident or having a permanent establishment in the UK counts as a UK connection.

What counts as medium or large?

A company is medium or large if it meets 2 or more of these conditions. You test the last financial year whose accounts filing deadline ended before the tax year starts, and the test must be met for two consecutive financial years.

Condition	Financial years beginning before 6 April 2025	Financial years beginning on or after 6 April 2025
Turnover	More than £10.2 million	More than £15 million
Balance sheet total	More than £5.1 million	More than £7.5 million
Employees	More than 50	More than 50 (unchanged)

HMRC’s manual (ESM10006A) explains that, because of filing deadlines and the two-year rule, the earliest tax year the higher thresholds can affect is 2027/28. So for 2026/27, a client with a usual 12-month financial year is still judged on the older figures. HMRC’s worked examples show a company near the line can move in either direction, so check your own year-ends.

If the parent of a group is medium or large, its subsidiaries must apply the rules too. Non-corporate clients use a simpler test based on turnover. Small clients must still confirm their size if a contractor or agency asks.

What must a client do?

If you’re responsible for the decision, HMRC’s guidance says you must:

1. Decide the status of every worker who works through their own intermediary, including those supplied through an agency.
2. Take reasonable care in making that decision.
3. Issue a Status Determination Statement (SDS) to the worker and to whoever you contract with. It must give your conclusion and the reasons for it.
4. Keep records of each decision, the reasons and the fees paid, plus the names and addresses of the contractors and their intermediaries.
5. Have a disagreement process. Respond to any disagreement within 45 days, and keep applying your original decision while you consider it.
6. Check again if the working practices change or you negotiate a new contract.

There’s no set legal format for an SDS, but HMRC recommends putting it in writing.

Using CEST

HMRC’s Check Employment Status for Tax (CEST) tool asks about the contract, who decides what work is done and how, how the worker is paid, and any benefits or expenses. HMRC says it will stand by the result as long as the information you give is accurate, and that you can use the result as a valid SDS. Putting inaccurate answers into CEST is one of HMRC’s own examples of not taking reasonable care.

Who pays the tax? The deemed employer and fee-payer

If the engagement is inside IR35, the deemed employer runs PAYE on the fees. The fee-payer is the party immediately above the worker’s company in the supply chain. The deemed employer is the lowest qualifying party in that chain that holds the SDS. If you contract directly with the worker’s company, you’re always the deemed employer.

According to HMRC’s fee-payer guidance, the deemed employer must:

• work out the deemed direct payment: the fee paid to the worker’s company, minus VAT, minus direct material costs, minus expenses that would have been tax-deductible for an employee
• deduct Income Tax and employee NI from that amount, often using tax code BR
• pay employer NI and the Apprenticeship Levy (if it applies) on top. These can’t be deducted from the payment to the worker’s company
• report through RTI on a Full Payment Submission, using the “off-payroll worker subject to the rules” indicator

The Employment Allowance can’t be used against these payments. For 2026/27, employer NI is 15% above the secondary threshold of £5,000 a year. Our guide to employer National Insurance for 2026/27 has the full rates.

The deemed employer doesn’t deduct student loan repayments. The worker doesn’t get statutory payments, pension auto-enrolment or employment rights from the deemed employer, because these come through their own company.

What happens if you get IR35 wrong?

HMRC’s guidance shifts the tax bill to the client in several situations:

• No reasons given: if you don’t give reasons for your decision, the worker’s Income Tax and NI become your responsibility.
• No reasonable care: if you don’t take reasonable care, the liability stays with you, even if another party has already made deductions (ESM10014). HMRC’s examples of failing include blanket decisions that every contractor is inside without looking at the facts, and not reconsidering when circumstances change.
• Late disagreement response: if you don’t respond within 45 days, the tax and NI become your responsibility.
• SDS not passed on: an agency that receives an SDS but doesn’t pass it down the chain becomes the deemed employer.
• Until the SDS is shared: the client is responsible for the tax and NI until it gives the worker and its contracting party the decision and reasons.

On the positive side, HMRC says a client that has taken reasonable care and issued the SDS doesn’t carry that liability, even if the decision later turns out to be wrong. That’s why your evidence and process matter as much as the decision.

How can contractor management or an EOR help?

There are two practical routes.

Keep the contractor, and run the process properly. Our contractor management service handles the operational side. That covers collecting the facts for each engagement, recording SDS decisions and reasons, tracking disagreements against the 45-day deadline, and running deemed employer payroll through RTI when an engagement is inside the rules.

Move the role onto employment. If a role is really a job, with set hours, management control and no real business risk for the worker, it may be simpler to employ the person. An employer of record can employ them for you on a UK contract with PAYE, pension and statutory pay, even if you don’t have a UK company. That removes the off-payroll question for that role, because the person is an employee.

Status decisions depend on the facts, and the client stays responsible for its SDS. For complex or high-value engagements, take advice from a qualified tax adviser, which HMRC itself lists as a sign of reasonable care.