What is IR35 and how does it affect UK hiring in 2026?

The rules were originally introduced in 2000 under Schedule 12 of the Finance Act and rewritten into Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003. The objective then and now: stop workers from disguising employment income as dividends to dodge employer National Insurance and the income-tax-vs-dividend-tax differential.

The rules apply when:

• A worker personally provides services to a client
• Via an intermediary (usually a personal service company, or PSC)
• And the working arrangement, looked at without the PSC, would be employment under the standard common-law tests (control, mutuality of obligation, personal service, integration)

If the arrangement is “inside IR35”, the entity paying the worker’s PSC must deduct PAYE income tax and employee NIC, and the engager pays employer NIC. The contractor still operates through the PSC commercially, but tax flows as if they were an employee.

The reforms moved the “deemed employer” status from the contractor’s PSC to the entity paying the PSC. That entity must operate PAYE and employer NIC on the engagement, even though the worker isn’t their employee.

Who is the deemed employer in 2026?

If you, the end client, contract directly with a contractor’s PSC: you are the deemed employer for IR35 purposes (assuming you’re a medium or large business, see Small Company Exemption below).

If there’s an agency between you and the PSC: the agency closest to the PSC is usually the deemed employer, but the end client retains liability for issuing the Status Determination Statement and can be liable if the SDS is incorrect.

Small Company Exemption

End clients qualifying as “small” under the Companies Act 2006 definition (2 of: turnover ≤£10.2m, balance sheet ≤£5.1m, employees ≤50) are out of scope of the 2021 reform. For small clients, the IR35 assessment and tax liability stay with the contractor’s PSC, as under the original 2000 rules.

The SDS must:

• Be in writing
• State the conclusion (inside or outside IR35)
• Provide reasons for the conclusion
• Have been arrived at with reasonable care by the client
• Be passed to the worker and to every entity in the contractual chain

HMRC’s own CEST tool (Check Employment Status for Tax) can be used to support an SDS, but only if the answers honestly reflect the working arrangement. Plenty of CEST determinations have been overturned at tribunal because the inputs were optimistic.

The disagreement process

If the contractor disagrees with the SDS, they have a statutory right to challenge it. The client must consider the challenge and respond within 45 days. Failure to follow the process = the client takes on deemed-employer liability.

Specific weaknesses:

• CEST doesn’t weight Mutuality of Obligation (MOO) properly. Tribunals routinely treat MOO as decisive; CEST treats it as background context.
• CEST handles substitution as a binary “can the worker send a substitute”, but tribunals look at genuine and unfettered substitution, which is much more demanding.
• CEST is short. The questions can be answered honestly two different ways depending on which day of the engagement you look at.

Best practice: use CEST as a starting point, then run an experienced IR35 specialist over the engagement contract and the day-to-day working pattern. Run the Contractor Classifier. If they disagree with CEST, weight the specialist’s view higher.

The reasoning: IR35 asks whether the working arrangement looks like employment. If you move a contractor onto an EOR, the working arrangement becomes employment, same role, same client, same hours, just routed through a different employer. HMRC’s likely view: the arrangement was already employment, you just made it explicit.

This matters because HMRC’s lookback period for IR35 enquiries is 6 tax years (longer for deliberate behaviour). Moving someone to an EOR doesn’t prevent HMRC opening an enquiry into the prior 6 years of PSC engagement.

When EOR is the right answer for an “inside IR35” engagement

If the contractor relationship is honestly assessed as inside IR35 from the start, i.e., the worker is genuinely a disguised employee and the client is content to engage them as such, EOR is one of three options:

1. Direct employment via your own UK entity
2. EOR engagement via Teamed Ltd as the legal employer
3. Continue PSC engagement but apply PAYE deduction via the deemed-employer mechanism

EOR is cleanest for sub-12-month engagements or when you don’t want to add to your own entity’s payroll. It does not retroactively cure prior IR35 risk.

1. Personal service

Is the worker personally required to perform the service, or can they send a substitute? Genuine, unfettered substitution rights are strong evidence of self-employment. “The client must approve the substitute” or “substitute must be qualified” clauses weaken the defence considerably.

2. Mutuality of Obligation (MOO)

Does the client have to offer work and does the worker have to accept it? Continuous obligation over time, even informally, indicates employment. Genuine ability to refuse work or finish an engagement without further obligation indicates self-employment.

3. Control

Who controls what work is done, where, when, and how? A self-employed contractor is engaged for an outcome; an employee is directed on method. Day-to-day supervision, fixed working hours, and required attendance at internal meetings push toward employment.

4. Integration

Is the worker part of the client’s organisation or genuinely external? Internal email addresses, line management of/by other staff, performance reviews, attendance at all-hands, these push toward employment. Branded as part of the team in customer-facing materials is the most-cited example.

Teamed Guard, keep the engagement, add the cover

Use Guard when the contractor relationship is genuinely outside IR35 in your honest assessment, you want to keep the direct commercial relationship with the contractor (often because they prefer it), and you want quarterly independent review plus a defined liability cap if HMRC challenges. Guard sits over the top of your existing PSC arrangement; the contractor invoices you, you pay them, and Teamed runs the classification review on the cadence.

Teamed Protect, transfer the engagement, transfer the risk

Use Protect when you want full liability transfer to Teamed. Mechanically: Teamed engages the contractor under our agreement, the contractor delivers the work to you, and we carry the IR35 risk in full. You get the work; we hold the deemed-employer position. This is the right answer for high-stakes engagements where the cost of an IR35 finding would be material to the business.

The other two engagement models

Beyond Guard and Protect, Teamed supports:

• EOR employment via Teamed Ltd as legal employer, for relationships that are genuinely employment dressed up as contracting. Switch the worker to direct employment via our EOR and the IR35 question disappears.
• Graduation Model, for converting contractors to employees on your own entity when you’re ready to scale, with continuous service preserved.

Teamed’s view on IR35: it’s a tax-status question, not a contractual-magic question. If the working arrangement looks like employment, structure it as employment via EOR. If it’s genuinely external, use Guard or Protect to back the position. Don’t buy synthetic outside-IR35 status through clever contracting; HMRC looks through it.