IR35

Who does IR35 apply to?

IR35 applies to contractors in the UK who provide services through an intermediary, usually a personal service company. Medium and large clients must decide whether each engagement falls inside IR35. Small clients (those meeting at least two of three size tests) are exempt from making that decision.

A client is small if it meets at least two of these three conditions: annual turnover no more than £10.2 million, balance sheet total no more than £5.1 million, or no more than 50 employees. Public sector bodies of any size must also apply the rules.

What is a status determination statement?

A status determination statement (SDS) is the written decision a medium or large client must produce for every contractor engagement, stating whether the worker falls inside or outside IR35 and explaining the reasoning. The client must give a copy to the contractor and to any agency in the chain.

A contractor who disagrees with the determination has the right to challenge it. The client must respond within 45 calendar days and either change the decision or explain why it stands.

What happens if a contractor is found inside IR35?

The fee-payer, usually the agency or the client itself, must operate PAYE and deduct income tax and National Insurance contributions before paying the contractor's PSC. The contractor effectively takes home pay in the same way as an employee, but without statutory employment rights.

Since April 2024, a PAYE set-off mechanism means HMRC can offset tax already paid at the PSC level when calculating any additional liability, which removes the risk of the same income being taxed twice.

How does IR35 affect global hiring?

IR35 is a UK-only rule. If your business engages contractors in other countries, different misclassification regimes apply. For UK contractors specifically, many businesses choose to hire them as employees directly or through a global employment platform to avoid the compliance burden of IR35 assessments entirely.

Moving a UK contractor to employment, either directly or through a global employment platform, resolves the IR35 question entirely because the off-payroll working rules simply do not apply to employees.

Frequently asked questions

• Does IR35 apply to contractors working outside the UK?+

  No. IR35 is a UK tax rule and only applies to engagements carried out in the UK. If a contractor is based overseas and works entirely outside the UK, the off-payroll working rules do not apply, though local misclassification rules in that country may do.
• Can a contractor appeal an IR35 decision?+

  Yes. A contractor who believes their status determination is wrong can formally challenge it. The client must review the challenge and respond in writing within 45 calendar days, either changing the determination or giving clear reasons for keeping it.
• Is IR35 the same as being an employee?+

  Not exactly. A worker found inside IR35 is taxed like an employee and pays broadly the same income tax and National Insurance, but they do not automatically gain employee rights such as paid holiday, sick pay, or unfair dismissal protection. Those rights come from employment law, not tax law.
• What is the CEST tool?+

  CEST stands for Check Employment Status for Tax. It is a free online tool published by HMRC that helps clients and contractors work out whether an engagement falls inside or outside IR35. HMRC has committed to standing behind results produced by the tool, provided the information entered is accurate.

Related terms

• Worker misclassification
• Independent contractor vs employee
• Permanent establishment (PE) risk
• Employer of Record (EOR)