IR35 & Off-Payroll Working Rules: A 2026 Guide for End-Clients and Contractors

IR35 is UK tax legislation that stops contractors using a limited company to pay less tax than an employee doing the same job. From 6 April 2021, medium and large private sector end-clients became responsible for determining a contractor's IR35 status. From 6 April 2026, higher thresholds remove thousands more businesses from scope.

What is IR35?

IR35, also called the off-payroll working rules or Intermediaries Legislation, is a UK tax regime introduced in 2000. It applies when a contractor supplies services through a Personal Service Company (PSC) but the working arrangement looks like employment. Where a contract is judged "inside IR35," PAYE income tax and National Insurance must be deducted from the contractor's pay.

The regime sits in two places in statute. Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 covers the original 2000 rules. Chapter 10 of the same Act, added in 2017 for the public sector and extended to the private sector in April 2021, covers the off-payroll working rules that shifted status decisions onto end-clients.

Who is responsible for IR35 status decisions?

Responsibility depends on the size of the end-client.

Medium and large private sector end-clients, and all public sector bodies, sit under Chapter 10. The client determines status and must issue a written Status Determination Statement before the first payment of each engagement. The fee payer, usually the recruitment agency paying the PSC, operates PAYE where a role is inside IR35.

Small private sector end-clients sit under Chapter 8. The contractor's PSC remains responsible for deciding status and for paying the correct tax.

A client is small where it meets at least two of the three statutory tests set out in the Companies Act 2006, which changed on 6 April 2026.

What changed on 6 April 2026?

The small company thresholds increased under the Companies Act:

HMRC estimates around 14,000 UK companies will move from medium to small on paper from 6 April 2026. The practical effect lands later because IR35 size is assessed against the prior financial year. Most newly exempt companies will only see the change bite during the 2027-28 tax year when 2025-26 accounts are tested against the new thresholds. The technical detail of the threshold shift is covered in our analysis of how changes to UK company size thresholds impact IR35 off-payroll working rules.

A second 2026 change matters just as much. Joint and Several Liability took effect on 6 April 2026 under Chapter 11, Part 2 of ITEPA 2003. Where an umbrella company sits in the labour supply chain, HMRC can recover unpaid PAYE and NICs from the agency or end-client. This runs alongside IR35 and creates a parallel tax risk that any hiring client using contingent labour must map. Read the full analysis in the Joint & Several Liability April 2026 guide, and the wider April 2026 umbrella company regulations piece.

A third change applies from the same date: mandatory payrolling of benefits in kind for all employers, excluding employment-related loans and accommodation. This affects PSCs providing benefits through their own companies.

How to determine IR35 status for a contractor engagement

Use the five-step sequence below. It reflects HMRC's "reasonable care" test, which is the legal standard a client must meet to avoid liability transferring under Chapter 10.

1. Step 1: Confirm company size. Check your 2024-25 accounts against the statutory tests to decide whether Chapter 8 or Chapter 10 applies to engagements starting in the 2026-27 tax year.
2. Step 2: Assess each engagement individually. Blanket role-level determinations fail the reasonable care test. Review control, substitution rights, mutuality of obligation, financial risk, and integration for every contractor.
3. Step 3: Run the CEST tool and validate. HMRC's Check Employment Status for Tax tool is binding where inputs reflect the real working arrangement. CEST does not test mutuality of obligation properly, so pair it with a second assessment where roles are borderline.
4. Step 4: Issue the Status Determination Statement. Give the written SDS to the contractor and the fee payer before the first payment. The SDS must state the decision and the reasons for it.
5. Step 5: Handle disputes through the client-led review process. If a contractor challenges the determination, the client has 45 days to respond with a reasoned outcome. Failure to respond makes the client the deemed fee payer and liable for PAYE.

What IR35 means for contractors

If a Chapter 10 end-client determines your assignment is inside IR35, the fee payer (normally Scantec as your agency) deducts PAYE income tax and Class 1 NICs from your pay before it reaches your PSC.

If the determination is outside IR35, you continue invoicing through your PSC and no tax is deducted at source. You remain responsible for corporation tax and your personal tax affairs.

If you work through Scantec's PAYE or umbrella models already, IR35 does not alter your pay arrangements.

Where you believe an inside determination is wrong, use the client-led review process. You have a statutory right to written reasons for the determination under section 61T of ITEPA 2003. If the client fails to respond within 45 days, liability for the tax shifts to them. Protective insurance such as IR35 Shield or Kingsbridge's IR35 Protect covers tax liabilities and legal fees arising from a disputed determination.

Consult Scantec's payroll models guide for how each engagement type flows through payroll, and our Key Information Documents resource for the statutory pay information you receive at the start of every assignment.

What IR35 means for end-clients

Liability for unpaid PAYE, NICs, interest, and penalties rests with the fee payer, but only where the client has taken reasonable care and issued a valid SDS. Where reasonable care fails, liability transfers to the end-client.

Four operational steps protect clients under the current regime. Document the SDS process for every engagement and retain records for at least six years. Apply an IR35 assessment tool that produces an audit trail rather than a one-line outcome. Train hiring managers to align day-to-day working practices with the contractual basis on which determinations are made. Offsets now apply for contractor tax already paid, which HMRC factors into any corrective assessment since April 2024.

Scantec supports clients with SDS preparation, agency-side fee payer payroll, and contract review on request. Our contract and temporary recruitment team handles IR35-inside and IR35-outside engagements across engineering, nuclear, and renewables.

How Scantec supports IR35 compliance

Scantec has operated under IR35 since the public sector reforms of April 2017 and has maintained an IR35 assessment protocol through every subsequent change. Three services sit under this page.

SDS review and contract audit for clients preparing engagements in the 2026-27 tax year. Fee payer payroll for inside-IR35 assignments across all contract placements. Dual IR35 and JSL due diligence for clients using a blend of PSC and umbrella workers, now that both regimes run in parallel.

The wider engineering contract market context driving demand for compliant engagements sits in our analysis of key trends impacting the technical engineering recruitment market and the longer-term future of engineering recruitment outlook on AI, the gig economy, and your workforce strategy.

Contact the IR35 team on 0151 666 8950 or email legislation@scantec.co.uk.

Frequently Asked Questions

What is IR35 in simple terms?

IR35 is UK tax legislation that applies when a contractor works through their own limited company but behaves like an employee. Where the rules apply, tax and National Insurance are deducted before the contractor is paid.

Who decides IR35 status in 2026?

Medium and large private sector end-clients decide status under Chapter 10 and issue a Status Determination Statement. Small private sector clients fall outside Chapter 10, so the contractor's PSC decides status under Chapter 8.

What are the new IR35 small company thresholds from April 2026?

Turnover rises to £15 million, balance sheet total rises to £7.5 million, and the 50-employee average stays unchanged. A business is small where it meets any two of the three tests.

Does IR35 still apply if a worker is inside an umbrella company?

No. IR35 applies to contractors working through a PSC. Umbrella workers are taxed as employees of the umbrella company. However, from 6 April 2026, Joint and Several Liability shifts umbrella PAYE risk onto the agency or end-client, so umbrella use brings a separate tax risk to manage.

What happens if a client does not take reasonable care with an IR35 determination?

Liability for unpaid tax, NICs, interest, and penalties transfers from the fee payer to the end-client. HMRC tests reasonable care by looking at process documentation, consistency, and whether the determination reflects actual working arrangements.

Can a contractor challenge an IR35 determination?

Yes. Under section 61T of ITEPA 2003, contractors have the right to written reasons and a client-led review. The client must respond within 45 days or liability for tax transfers to the client.

Speak to our IR35 team

If you want SDS preparation, contract audit, or fee payer payroll for a 2026-27 engagement, Scantec's IR35 specialists can review your supply chain against both IR35 and the new JSL framework. Call 0151 666 8950, email legislation@scantec.co.uk, or visit our consultants page to start a confidential conversation.

Author

Peter Bates founded Scantec in 1990 and still leads the business today. Over 35 years, he has built a specialist engineering, manufacturing and scientific recruiter on four principles: delivery, integrity, transparency and compliance. His focus remains consistent, placing the right people, running a compliant operation and developing a team equipped to do the same.

Last reviewed: 20 April 2026 | Next review: 6 October 2026