IR35 and Off-Payroll Working in 2026: What UK Businesses Need to Know

Q: How is employment status determined?

### 1. Control Who decides what work is done, when, how and where? If the client controls the worker, this suggests employment. ### 2. Substitution Can the worker send someone else? A genuine right of substitution indicates self-employment. ### 3. Mutuality of obligation Is the client obliged to offer work and must the worker accept? If not, this suggests self-employment. ### 4. Financial risk Does the worker bear financial risk? Providing own equipment, correcting work at own cost, and holding own insurance suggest self-employment. ### 5. Integration Is the worker integrated into the organisation? If treated like an employee, this suggests employment.

The Payroll Lab - Adil Qureshi

Sep 25

2 min read

Updated: Oct 2

What is IR35?

IR35 (also known as the off-payroll working rules) is a set of tax rules designed to ensure that workers who would be employees if engaged directly are taxed as employees, even when they provide their services through a personal service company (PSC).

The rules apply when a worker provides services to a client through their own company, but the relationship would be one of employment if the intermediary were removed.

Who is responsible for determining IR35 status?

For medium and large clients, the client determines status and the fee payer deducts tax. For small clients, the worker's PSC determines status and deducts tax.

For financial years beginning on or after 6 April 2025, a company generally meets the small-company size test if it satisfies at least two of these: annual turnover not more than £15 million, balance sheet total not more than £7.5 million, and no more than 50 employees on average. For earlier financial years, the previous £10.2 million turnover and £5.1 million balance-sheet thresholds may apply. IR35 client-size rules also involve the two-year test, filing-period timing and transitional provisions, so check HMRC guidance for the relevant tax year.

How is employment status determined?

1. Control

Who decides what work is done, when, how and where? If the client controls the worker, this suggests employment.

2. Substitution

Can the worker send someone else? A genuine right of substitution indicates self-employment.

3. Mutuality of obligation

Is the client obliged to offer work and must the worker accept? If not, this suggests self-employment.

4. Financial risk

Does the worker bear financial risk? Providing own equipment, correcting work at own cost, and holding own insurance suggest self-employment.

5. Integration

Is the worker integrated into the organisation? If treated like an employee, this suggests employment.

Consequences of getting IR35 wrong

If HMRC determines a contractor should have been inside IR35: back-dated PAYE and NI plus interest, penalties up to 100% of tax owed, personal liability for directors, and reputational damage.

For a contractor earning £500/day for 200 days, the liability could exceed £40,000 per year.

Practical steps for compliance

Assess every contractor individually
Use a robust assessment process (CEST tool plus professional advice)
Review contracts and working practices
Implement a compliant payment process
Keep records and review annually
Communicate with your contractors

Common myths about IR35

Myth: If the contract says self-employed, they are outside IR35. False. HMRC looks at the actual relationship.

Myth: Using a limited company means automatically outside IR35. False. IR35 targets PSCs used to disguise employment.

Myth: Having own insurance means outside IR35. False. Insurance is one factor but not determinative.

How The Payroll Lab can help

We assess contractor employment status, prepare Status Determination Statements, review contracts, and set up compliant payment processes. Contact us for a free consultation.

Book a free call or call us on 020 4542 3391.