IR35 status determination: a UK hiring guide for 2026

IR35 decides whether a contractor supplying services through a personal service company (PSC) is, for tax purposes, a deemed employee of the end-client. Since April 2021, the end-client in the medium and large private sector has owned the status call. Get it wrong and PAYE, employee National Insurance, employer NI and the Apprenticeship Levy fall on whoever sits one link down the contractual chain, usually the agency. This article is for UK hiring managers, finance leads and in-house counsel who want a working framework: what a defensible Status Determination Statement (SDS) looks like, how far you can trust CEST, which recent cases have shifted the tests, and when an Employer of Record model cuts the knot.

What IR35 is, and what changed in April 2021

IR35 sits in two chapters of the Income Tax (Earnings and Pensions) Act 2003. Chapter 8 makes the PSC itself assess status when the engagement is with a small client. Chapter 10 (the off-payroll working rules) pushes the determination to the end-client when the engagement is with a medium or large private-sector client, or any size of public-sector client.

The April 2021 reform extended Chapter 10 from the public sector into the private sector. The consequences for UK employers are:

• The end-client must issue an SDS for every PSC contractor before the first payment.
• The SDS must state the conclusion (inside or outside IR35) and the reasons.
• The SDS must be given to the worker and to the party the client contracts with (usually an agency).
• If the engagement is inside IR35, the fee-payer (typically the agency) must operate PAYE and deduct employee National Insurance before paying the PSC.
• Employer NI and the Apprenticeship Levy are owed by the fee-payer on top.
• If the client fails to take reasonable care with the SDS, liability for unpaid tax can transfer back up the chain to the client.

Small clients, defined by the Companies Act 2006 size tests (currently two of: turnover no more than GBP 10.2 million, balance sheet no more than GBP 5.1 million, no more than 50 employees, though these thresholds are expected to rise), remain outside Chapter 10. In that case the PSC retains the Chapter 8 self-assessment obligation.

This is general guidance; for tailored advice on your group structure, contact info@octagon.nl.

Inside versus outside IR35: the three core tests

HMRC's starting point, and the courts', is the same three-factor test drawn from Ready Mixed Concrete v Minister of Pensions (1968) and refined in the decades since:

1. Personal service and substitution. Can the contractor send a genuine substitute, in practice as well as on paper? A fettered right (requiring client approval, paid by the contractor, same skill set) is normally consistent with employment.
2. Mutuality of obligation (MOO). Is the client obliged to offer work during the term and the contractor obliged to accept it? HMRC's position since the Atholl House and Kickabout line of cases is that MOO exists the moment there is a contract for any paid work, so MOO is rarely decisive on its own.
3. Control. Does the client direct what, how, when and where the work is done? A standing remote engagement with agreed deliverables leans outside; an embedded role inside a team under a line manager leans inside.

The courts then step back and ask whether, taken as a whole, the relationship is consistent with being in business on one's own account. The Court of Appeal in Atholl House Productions Ltd (2022) reinforced that this "stand back" stage is not optional: control, substitution and MOO are inputs, not a scoreboard.

Three recent cases worth knowing:

• Kickabout Productions Ltd v HMRC [2022] EWCA Civ 502. Talksport presenter held inside IR35. Control and MOO outweighed a substitution clause that had never been exercised.
• HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501. Presenter Kaye Adams held outside IR35. The Court of Appeal accepted that a long-running career as a self-employed journalist, pursued across multiple clients, was a weighty part of the "in business on own account" analysis.
• HMRC v Professional Game Match Officials Ltd [2024] UKSC 29. Part-time football referees held to have sufficient MOO and control for the match-day contracts to be employment contracts. The Supreme Court reaffirmed that the question is always one of fact and degree.

The practical read-through: contracts matter, but working practice matters more. An SDS built only from the paper contract, without a working-practice review, is fragile.

What a defensible Status Determination Statement looks like

HMRC's Employment Status Manual (ESM10014 onwards) sets out what "reasonable care" means. A defensible SDS normally contains:

• The worker's name and the role being performed.
• The contractual chain: end-client, agency (if any), PSC, worker.
• The start and expected end date of the engagement.
• The status conclusion (inside or outside IR35).
• The reasons, mapped to the three core tests plus the "stand back" view.
• The evidence relied on: contract clauses, a written working-practice questionnaire signed by the line manager, and ideally the CEST output.
• A date and a named author.
• A dispute process: how the worker or fee-payer can challenge the determination within 45 days (ITEPA s61T).

Reasonable care is a process standard, not a result standard. HMRC has been explicit in published guidance and in tribunal evidence that a blanket "all contractors are inside IR35" policy is not reasonable care. Neither is a blanket "all contractors are outside" policy. Each engagement needs its own assessment.

CEST: what it does well, what it does not

CEST is HMRC's free online tool. Use it, but know its limits.

What CEST does well:

• Standardises the inputs across your organisation.
• Produces a printable output HMRC will normally stand behind, provided the inputs are accurate and the working practice matches.
• Has been updated since 2019 to strengthen the control and substitution questions.

What CEST does less well:

• It does not directly test mutuality of obligation. HMRC's stated position is that MOO is assumed to exist in any contract for payment, which is contested.
• It returns an "unable to determine" result in a non-trivial share of cases. HMRC's most recent published usage data shows a material "undetermined" rate, which leaves the end-client to reach a conclusion on its own.
• It is only as good as the inputs. If the line manager answering the working-practice questions has not read them carefully, the result is not defensible.

Best practice is to run CEST and retain the output as one piece of evidence, alongside a written working-practice questionnaire and, for senior or long-running engagements, a short memo from employment counsel.

Implications for each party in the chain

The end-client carries the reasonable-care obligation and, if it fails, the tax liability. The compliance load is highest here: SDS issuance, dispute handling, record-keeping, policy design, line-manager training.

The agency as fee-payer must operate PAYE on inside-IR35 engagements, pay employer NI and the Apprenticeship Levy, and carry the liability if the client's SDS is not passed down the chain.

The PSC contractor inside IR35 loses the salary-dividend tax mix that made PSC contracting attractive. The take-home is typically similar to permanent employment without the benefits. Many contractors in this position prefer to move to umbrella PAYE, to the client's payroll, or to an EOR that carries the employment relationship directly.

HMRC enforcement trend

HMRC's off-payroll compliance activity has scaled steadily since 2021. Published settlement data and the National Audit Office's 2022 review of public-sector implementation both pointed to a programme still working through early-reform errors, with settlements reaching the tens of millions for single government departments. In the private sector, HMRC's Employer Compliance reviews now routinely include an IR35 workstream where the engager uses any material volume of PSC labour. The direction of travel is more data-driven triage (using Real Time Information and Companies House filings to identify high-PSC-volume employers), not less.

Where the EOR model changes the calculus

An Employer of Record employs the worker directly, on PAYE, under a compliant UK employment contract. The PSC is out of the chain. IR35 does not apply, because there is no intermediary. For UK end-clients, the EOR option is worth considering when:

• The role is substantively employment in all but name (embedded, full-time, line-managed).
• The worker wants permanent employment rights and the client wants the talent.
• The contractual chain is already complex (international worker, cross-border tax exposure, sponsor-licence considerations).
• The administrative load of running a defensible SDS process outweighs the flexibility of PSC contracting.

EOR does not suit every case. Short engagements for genuinely self-employed specialists, with substitution, multiple concurrent clients and autonomous control, remain best handled as outside-IR35 PSC work with a proper SDS. The judgement call is engagement by engagement.

FAQ

Who issues the SDS, the agency or the end-client?

The end-client issues the SDS, but only if it is a medium or large private-sector organisation, or any size of public-sector body. Small private-sector clients are out of Chapter 10 and the PSC retains Chapter 8 self-assessment responsibility. The SDS must be given to both the worker and the party the client contracts with.

How long does a contractor have to dispute an SDS?

The worker or fee-payer has no fixed statutory window to raise a dispute, but the client must respond within 45 days of receiving a representation (ITEPA s61T). Until the client responds, liability can stay with the client. A written dispute process in the SDS itself is best practice.

Can we rely on CEST alone?

You can rely on a CEST output if the inputs accurately reflect the written contract and the actual working practice, and if CEST returns a determinate result. If CEST returns "unable to determine", or if the engagement is senior, long-running or cross-border, supplement it with a written working-practice review and legal sign-off.

Does IR35 apply to overseas clients?

Chapter 10 applies where the end-client has a UK connection, defined in ITEPA s60I as UK residence or a UK permanent establishment. An overseas client with no UK presence is generally outside Chapter 10, and the PSC self-assesses under Chapter 8. Cross-border engagements involving a UK subsidiary of an overseas group usually bring the UK subsidiary into scope as the end-client.

What happens if we do nothing and keep paying the PSC gross?

If the engagement is inside IR35 and no SDS is issued, HMRC can pursue the unpaid PAYE, employee NI, employer NI, Apprenticeship Levy and interest from the party in the chain responsible at the time. Where the end-client has failed to take reasonable care, liability can move back to the client even after payments have passed down the chain. Penalties of up to 100 per cent of the underpayment apply in cases of deliberate behaviour.

Are umbrella companies a solution?

Umbrella employment removes IR35 from the engagement because the worker becomes an employee of the umbrella. It does not, on its own, solve the wider questions of holiday pay compliance, Working Time Regulations, or the forthcoming statutory umbrella regulation announced by the UK government. Engaging with a reputable umbrella, and testing it against the Joint Forum on Expatriate Tax and NICs (JFETN) guidance, is still necessary due diligence.

Does IR35 apply to sole traders?

No. IR35 is about payments through an intermediary, usually a PSC. A sole trader with no intermediary is assessed under the general employment-status tests in s44 ITEPA and HMRC's Employment Status Manual, not under IR35. The risk to the end-client is different in form but similar in substance: if the sole trader is a deemed employee, PAYE and NI apply.

What this means for UK employers

IR35 compliance is not a one-off exercise. It is an operating discipline. The employers handling it well in 2026 do four things consistently. First, they design a policy that differentiates engagement types (short specialist, long embedded, senior advisory) and routes each through the right pathway. Second, they train line managers, because the working-practice answers come from them and the SDS stands or falls on their accuracy. Third, they document. Every SDS, every CEST run, every dispute, every line-manager questionnaire, kept together for at least six years per HMRC's record-keeping requirements. Fourth, they revisit. An engagement that started outside IR35 can drift inside over time as the role embeds, the control tightens and the substitute clause stops looking credible.

The employers handling it poorly are usually doing one of three things: running blanket determinations, treating the contract clauses as the whole truth, or leaving IR35 on the finance team's desk when it is really a cross-functional issue for HR, tax, procurement and the hiring manager together. The cost of the second category shows up in HMRC settlement letters about two to four years after the error.

How Octagon helps

Octagon is one of the few international HR specialists that can run both sides of the UK contractor question. For engagements that are genuinely outside IR35, our UK payroll and HR advisory team support the SDS process, working-practice reviews and dispute handling. For engagements that are substantively employment, our UK EOR service places the worker on PAYE under a compliant UK contract, removing IR35 from the chain altogether. We have been operating in regulated international hiring since 1987, which matters here because IR35 rarely sits alone: there is usually a sponsor-licence question, a cross-border payroll question and a client-side assurance question sitting next to it. Contact info@octagon.nl to discuss a UK contractor population you want to get right.