IR35 — formally the Intermediaries Legislation — has been part of UK tax law since April 2000. The core idea has never changed: if a contractor would be an employee were it not for the limited company (or other intermediary) sitting between them and their client, they should pay broadly the same tax and National Insurance as an employee. What has changed, substantially, is who decides that question and who bears the risk if they get it wrong.

The IR35 changes explained in this guide centre on two reforms: the 2017 public sector off-payroll rules and the April 2021 extension to medium and large private-sector organisations. Together, those two changes shifted the compliance burden away from individual contractors and onto the businesses engaging them — a reversal that has reshaped how contractors are hired across the UK economy.

Whether you are a contractor reviewing your current engagements, a business onboarding freelancers, or a finance director trying to understand your company's exposure, this guide covers the key mechanics, the status tests that matter, and the practical steps both sides need to take.

When IR35 was introduced in 2000, the compliance responsibility sat entirely with the contractor and their personal service company (PSC). If HMRC believed an engagement should have been taxed as employment, it pursued the worker's PSC — not the client, and not an agency in the chain.

For most of the 2000s and 2010s, enforcement was patchy. HMRC won relatively few tribunal cases because the status tests are genuinely fact-specific, and workers who took proper advice could often demonstrate legitimate outside-IR35 positions. Between roughly 2015 and 2021, market data suggested that around 60% of contractors providing services through a PSC were operating outside IR35 — a figure that reflects genuine flexibility in how contractors structured their work, but which HMRC considered overstated.

Why HMRC wanted change

HMRC's stated concern was non-compliance at scale. Its view was that many contractors were using the PSC structure primarily for tax efficiency rather than because their engagements genuinely fell outside IR35. Rather than try to investigate hundreds of thousands of individual PSCs, the government chose a structural solution: move the determination obligation to the entity with the most information about the working arrangements — the end client — and make that entity financially liable if it gets the assessment wrong.

The public sector went first in April 2017. Three years of data from that rollout — which showed a significant shift in contractor tax status — informed the design of the 2021 private-sector reforms. Those reforms, delayed by a year due to the pandemic, came into force on 6 April 2021.

The April 2021 changes did not rewrite the definition of IR35 — the status tests themselves remain the same. What changed is the chain of responsibility when a contractor operates through an intermediary such as a PSC.

Before April 2021 (private sector)

The worker's PSC was responsible for determining whether IR35 applied to each engagement. If it did, the PSC had to account for PAYE and National Insurance through its own payroll. The client had no formal role in the process.

After April 2021 (private sector, medium and large clients)

For engagements where the end client is a medium or large private-sector organisation, the end client must now:

• Assess the IR35 status of the engagement
• Issue a written Status Determination Statement (SDS) to the worker and any agency in the supply chain
• Operate PAYE and employer's National Insurance if the engagement is assessed as inside IR35
• Respond to any disagreement raised by the contractor within 45 days

The fee-payer in the supply chain — typically a recruitment agency — is responsible for deducting PAYE and NICs from payments made to the PSC once the SDS confirms inside-IR35 status.

The small company exemption

If the end client meets the definition of a small company under the Companies Act 2006 — satisfying at least two of: annual turnover no more than £10.2 million, balance sheet total no more than £5.1 million, and no more than 50 employees — the old rules still apply. The worker's PSC determines its own status, and HMRC pursues the PSC if it disagrees. This exemption applies to the end client, not to agencies or other entities in the supply chain.

Whether a contractor is inside or outside IR35 depends on the same three core employment-law tests that courts and tribunals have applied for decades. The 2021 reforms changed who applies those tests — not what the tests are.

Control

The most significant test. Does the client control how, when, and where the work is done — or does the contractor have genuine discretion over their methods? A contractor who turns up to a client's office every day, follows the client's procedures, and works hours set by the client looks more like an employee than an independent business. A contractor engaged to deliver a specific outcome, using their own methods and judgment, looks less like one.

Substitution

Can the contractor send a suitable substitute to carry out the work, without the client's approval being required for the individual? A genuine, unrestricted right of substitution is a strong indicator of self-employment. Clauses that give the right in theory but are never exercised in practice carry limited weight at tribunal.

Mutuality of obligation

Is the client obliged to offer work, and is the contractor obliged to accept it? An employee typically has an ongoing obligation on both sides. A contractor engaged project by project, with no guarantee of further work and no obligation to accept it, demonstrates a weaker employment relationship.

Other relevant factors

Beyond the three main tests, tribunals also consider financial risk (does the contractor risk their own money?), whether the contractor provides their own equipment, whether they work for multiple clients, and whether they are integrated into the client's organisation in a way that looks like employment. No single factor is conclusive — HMRC and the tribunals look at the overall picture.

HMRC's Check Employment Status for Tax (CEST) tool is available online and produces an IR35 status result based on answers to a series of questions. It is widely criticised for oversimplification — particularly its failure to adequately address mutuality of obligation — and a CEST result is not binding on HMRC. It is useful as a starting point, but should not be treated as a substitute for a proper contractual and working-practices review.

A Status Determination Statement (SDS) is the formal document a medium or large end client must produce for each engagement. Getting the SDS right matters because a defective or missing SDS means the liability for PAYE and NICs sits with the client — not the agency or the worker — until a valid SDS is issued.

What the SDS must include

• A clear conclusion: inside IR35 or outside IR35
• The reasoning behind that conclusion — not just a tick-box, but a genuine explanation of which status tests were applied and how the facts of the particular engagement were weighed
• The date it was issued

The SDS must be given to the worker and to the next party down the supply chain (typically the agency). Without it, the client cannot lawfully pass the liability onwards.

The disagreement process

A contractor who receives an inside-IR35 SDS has the right to formally disagree. The client must respond within 45 days, either maintaining the determination with further reasoning or reversing it. Ignoring a disagreement — or issuing a boilerplate response — does not satisfy the statutory requirement and leaves the client exposed.

Blanket determinations

A recurring issue since the 2021 reforms is clients issuing blanket inside-IR35 determinations for all contractors, regardless of the actual working arrangements of each engagement. This approach — often driven by a desire to avoid the administrative burden of individual assessments — is not compliant. The legislation requires a genuine, individual assessment of each engagement. HMRC's guidance is clear that blanket policies do not satisfy the off-payroll rules. More pragmatically, it also drives away skilled contractors who can demonstrate a legitimate outside-IR35 position, limiting access to specialist talent.

The data reflects this shift: before the 2021 reforms, the majority of contractors operated via PSC on outside-IR35 terms. Post-2021, the balance has reversed — with the majority now engaged on-payroll or through umbrella companies. Some of that reflects genuine status re-assessment. Some of it reflects blanket policies that are administratively convenient but legally questionable.

When a contractor is assessed as inside IR35 — or when a client imposes a blanket policy that treats all contractors as inside — the typical outcome is engagement through an umbrella company. The contractor becomes an employee of the umbrella, which processes their pay through PAYE, deducting income tax and employee's National Insurance before passing on the net payment.

How umbrella companies work legitimately

A compliant umbrella company receives the contract rate from the agency or client, deducts employer's National Insurance Contributions, the apprenticeship levy, and its own margin, then pays the remainder as salary through PAYE. The contractor receives a net payment after deductions and should receive a payslip showing all deductions clearly.

The risks

Not all umbrella companies are compliant. The sector has attracted a significant number of arrangements marketed as tax-efficient alternatives — schemes that attempt to pay contractors partly in loans, annuities, or other non-taxable forms. HMRC has consistently challenged these arrangements, and contractors who used them have faced large tax bills, sometimes years after the fact. HMRC has made it clear that the contractor — not the promoter — is liable for any unpaid tax.

As recently as April 2026, commentary in the contractor market has highlighted continued concerns about umbrella company malpractice, including:

• Hidden deductions that reduce take-home pay below what was quoted
• Misrepresentation of employment rights and holiday pay entitlements
• Schemes that continue to market themselves as tax-advantaged despite HMRC's published Managed Service Company legislation and loan charge rules

If you are being directed to use a specific umbrella company by an agency, you are entitled to ask for a full illustration of all deductions before accepting. If anything in the payment model looks unusually tax-efficient, treat it as a serious warning sign and take independent advice before signing.

IR35 enforcement has become a substantial part of HMRC's compliance activity. The HMRC Annual Report for 2024–25 confirms that the off-payroll working rules remain a priority area within the wider effort to close the tax gap — the difference between tax that is theoretically owed and tax that HMRC actually collects.

Who HMRC targets

HMRC's compliance activity under the off-payroll rules operates on two levels. At the higher level, it conducts employer-level investigations into medium and large organisations that engage significant numbers of contractors, reviewing whether SDS processes are robust and whether PAYE obligations have been met where engagements are inside IR35. At the individual level, it pursues workers and PSCs in small-client scenarios where the old self-assessment rules still apply.

The public sector as a model

The 2017 public sector reforms provided a test case for the 2021 private-sector rollout. Council audit reports and internal compliance reviews in the public sector — including reports covering 2023–24 — continue to surface implementation gaps: SDS processes not properly followed, agencies not receiving determinations, and contractors incorrectly treated as outside IR35 for administrative reasons. HMRC uses audit findings from the public sector to refine its private-sector enforcement approach.

What this means in practice

For contractors: if you are operating outside IR35 in a small-client engagement, you remain responsible for your own status determination and should be able to support it with a properly drafted contract and evidence of your actual working practices. The two rarely align perfectly, and the gap between them is where HMRC investigations begin.

For medium and large businesses: an SDS issued without genuine analysis, or a blanket inside-IR35 policy issued purely to reduce administrative friction, is an exposure — not a safe harbour. HMRC expects to see documented, engagement-specific reasoning behind each determination.

Whether you are a contractor reviewing an existing engagement or a business building an IR35 compliance process from scratch, these are the practical steps that matter.

These are the practical errors that create the most exposure for contractors and businesses alike.