IR35: The Complete Guide for UK Contractors in 2026

What Is IR35?

IR35 is the shorthand name for HMRC's intermediaries legislation, originally introduced in April 2000. Its purpose is simple: to ensure that workers who operate through an intermediary (usually a limited company) but who would otherwise be considered employees pay broadly the same tax and National Insurance as employees.

In HMRC's view, if you'd be an employee without your company in the middle, you should be taxed like one — even though you invoice through a limited company. If IR35 applies to your engagement, it's said to be "inside IR35." If it doesn't, you're "outside IR35" and can continue to pay yourself through dividends in the normal tax-efficient manner.

The stakes are significant. A contractor earning £100,000 outside IR35 might take home roughly £78,000 after Corporation Tax and dividend tax. The same contractor caught inside IR35 could take home closer to £62,000 after Income Tax and National Insurance. That's a difference of around £16,000 per year.

Inside vs Outside IR35

The fundamental question is whether your working arrangement looks more like employment or genuine self-employment. HMRC and the courts have developed three key tests over decades of case law:

The Three Key Tests

1. Substitution Can you send someone else to do the work in your place? A genuine contractor has the right of substitution — they can provide a qualified replacement without the client's unreasonable refusal. If you must perform the work personally, that points towards employment.

2. Mutuality of Obligation (MOO) Is the client obliged to offer you work, and are you obliged to accept it? In a genuine contract for services, you can turn down work, and the client isn't required to provide it. If there's an ongoing expectation on both sides, that resembles employment.

3. Control Does the client control how, when, and where you do the work? Employees are typically told what to do, how to do it, and when to show up. A genuinely self-employed contractor controls their own working methods, hours, and location.

No single test is decisive. It's the overall picture that matters. You might fail on one test but clearly pass on the other two — and still be outside IR35.

Other Relevant Factors

Beyond the big three, tribunals also consider:

• Financial risk: Do you bear financial risk? Contractors who provide their own equipment, carry professional indemnity insurance, and risk not being paid for unsatisfactory work look more like genuine businesses.
• Part and parcel of the organisation: Are you integrated into the client's team, attending staff meetings, using a company email address, and sitting in their hierarchy? Or are you clearly a separate entity delivering a defined project?
• Right to terminate: Employment contracts typically have notice periods. Contracts for services have delivery milestones and fixed end dates.
• Multiple clients: Working for several clients simultaneously (or having the freedom to do so) supports outside IR35 status.

Who Decides Your IR35 Status?

This is where it gets complicated, and where the rules have changed significantly in recent years.

The Off-Payroll Rules (from April 2021)

Since April 2021, medium and large private sector clients have been responsible for determining your IR35 status — not you. This aligns with rules that have applied in the public sector since April 2017.

Here's how it works in practice:

1. The client assesses whether your engagement falls inside or outside IR35
2. They issue a Status Determination Statement (SDS) to your limited company and the fee-payer (often an agency)
3. If the determination is "inside IR35," the fee-payer must deduct Income Tax and National Insurance before paying your company
4. If "outside IR35," your company receives gross payment as normal

Small Company Exemption

If your end client qualifies as a "small company" under the Companies Act (meeting two of three criteria: turnover under £10.2 million, balance sheet under £5.1 million, fewer than 50 employees), the old rules still apply — and you, the contractor, determine your own IR35 status.

Many consultants and contractors working for startups and SMEs fall into this category. It gives you more control, but it also means you carry the risk if HMRC disagrees with your assessment.

HMRC's CEST Tool

HMRC provides a free online tool called the Check Employment Status for Tax (CEST) tool. You answer a series of questions about your engagement, and it gives you a determination.

Should You Rely on CEST?

CEST is a useful starting point, but it has well-documented limitations:

• It doesn't adequately weigh mutuality of obligation
• It can produce "unable to determine" results, which leaves you nowhere
• HMRC says it will stand behind CEST determinations — but that promise hasn't been fully tested in tribunals
• The questions are somewhat rigid and don't capture the nuances of every engagement

Our recommendation: use CEST as one input, but don't treat it as gospel. For significant contracts, consider getting a professional IR35 assessment that analyses the specific terms and working practices of your engagement.

Recent Case Law Worth Knowing

Atholl House (Kaye Adams) — 2022

Former HMRC victory overturned on appeal. The tribunal found that the BBC presenter Kaye Adams was genuinely in business on her own account, despite HMRC arguing the engagement was employment. Key takeaway: being "part of a team" doesn't automatically mean employment if the contractual terms support self-employment.

PGMOL (Football Referees) — 2024

Professional football referees were found to be employees of PGMOL, not self-employed. The decision hinged on mutuality of obligation and the degree of control PGMOL exercised. Key takeaway: even highly skilled professionals can be caught by IR35 if the working relationship resembles employment.

The Trend

Courts are looking increasingly at the "reality" of the working relationship, not just what the contract says. Having a beautifully drafted contract that says all the right things means nothing if your actual working practices don't match. If you sit in the client's office five days a week, attend their stand-ups, use their equipment, and report to their manager — no contract clause about substitution will save you.

Implications for Your Limited Company

If an engagement is determined to be inside IR35, the tax implications are:

• Income Tax and employee NICs are deducted from your fee before it reaches your company
• Employer NICs (13.8%) are also payable — often absorbed by the fee-payer, but this can reduce what they're willing to pay you
• You can deduct a 5% flat-rate expense allowance from the deemed payment to cover running your company
• Dividends from the deemed payment are not an option — the income has already been taxed as employment

For contractors with all engagements inside IR35, the tax advantage of operating through a limited company is largely eliminated. Some choose to move to umbrella company arrangements instead, which handle the payroll mechanics.

For those with a mix of inside and outside engagements, keeping the limited company still makes sense — you just need to handle the inside IR35 engagements correctly on your company accounts.

How to Protect Your IR35 Position

Get Your Contracts Right

Ensure your contracts reflect the reality of how you work. Include genuine substitution clauses, avoid language that implies employment (like "holiday entitlement" or "line manager"), and specify deliverables rather than hours.

Document Your Working Practices

Keep evidence that supports your outside IR35 status: emails showing you set your own schedule, records of using your own equipment, evidence of working for multiple clients, and instances where you exercised your right to turn down work.

Review Each Engagement Separately

IR35 applies engagement by engagement, not to you as an individual. You could be outside IR35 with one client and inside with another. Assess each contract on its own merits.

Use Professional Assessment Tools

Accounted's IR35 assessment feature analyses your contract terms and working practices against the established case law tests. It highlights risk areas and suggests practical steps to strengthen your position — giving you clarity before you sign a contract, not after HMRC comes knocking.

Get Started with Accounted

Whether you're a contractor navigating IR35 determinations or a consultant managing multiple engagements, Accounted helps you stay on top of your tax position. From IR35 assessment to Corporation Tax filing, everything is in one place. Start your free trial today — no credit card required.

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