What is IR35?

What is IR35? IR35 is an important piece of intermediaries legislation that governs how tax is paid when working with contractors. If your business has appointed contractors or freelancers working through an intermediary, you need to know how IR35 works.

As a business, ensuring that your recruitment activities are conducted in full compliance with all relevant tax legislation should always be seen as a top priority. This means keeping abreast of the latest developments in tax law, and making sure that your organisation has updated its policies accordingly.

IR35 is a good example of a recently updated piece of tax legislation, which was first introduced in 2000, that has had a significant impact on off-payroll working rules and the way that professionals work through intermediaries. If your business regularly works with contractors or intermediaries, it is essential that you have a good understanding of how IR35 works.

Here, we will examine the basics of how IR35 works, how IR35 status is determined, and how to factor these responsibilities into your recruitment activities.

What is IR35? What does IR35 stand for?

IR35 is the commonly used name used to describe the revamped system of off-payroll working rules for businesses, contractors and their intermediaries. The overall aim of this piece of tax legislation is to combat tax avoidance. It prevents companies from engaging contractors on a self-employed basis to ‘disguise’ their true employment status, and thereby avoiding paying the right amount of income tax.

In the past, it was possible for individuals to pay a lower rate of income tax by supplying their services to clients through an intermediary or their own limited company, rather than being on the payroll directly. Businesses would also take advantage of this ambiguity by avoiding having to pay National Insurance Contributions (NICs) for these ‘disguised employees’ or provide benefits such as paid holidays, pensions or sick pay.

IR35 closes this loophole by making it a requirement for off-payroll contractors to pay broadly the same Income Tax and National Insurance contributions as employees, if it can be shown that they would have been classified as employees if they were providing their services directly to the client.

The name ‘IR35’ is not the official name for this piece of legislation - instead, it refers to the name of Inland Revenue (IR, now renamed HM Revenue & Customs) and the number of the press release used to announce the original version of the law back in 1999.

How is IR35 status determined?

Under the IR35 rules, contractors and self-employed workers who are supplying services to a client will be classified as being either inside IR35 or outside IR35. If they are inside IR35, it is deemed that they operate equivalently to employees and should therefore be taxed accordingly; if they are outside IR35, they are seen as being legitimately independent professionals who can pay tax at a lower rate.

A number of factors may determine that a contract should be seen as being inside IR35, including:

• The worker is required to personally complete the work that they have been contracted to do.
• The worker receives employment benefits such as paid leave or sick pay.
• The worker is paid on an hourly or timed basis.
• The business supervises the worker's activities closely, supplies them with equipment or asks them to work at their premises.
• The worker is employed by a single client on a long-term basis.
• Rejected work is corrected at the company's expense.

Meanwhile, the following factors may indicate that a contract can be classed as falling outside IR35:

• The worker's company has its own distinct branding and premises, and pays its own business insurance.
• The worker is employed by their own limited company and does not receive paid holidays, sickness leave or other employee benefits from the client.
• The worker has the right to delegate or substitute work to another person, and has the flexibility to complete the work according to their own schedule, with their own equipment.
• The worker is paid on a project basis, or at a fixed rate.
• The worker is contracted by more than one client at a time, or delivers projects for a variety of clients in a short period of time.
• Rejected work is corrected at the worker's expense.

Examining all of these factors will provide clarity on what the worker's employment status should be under IR35, and ensure that tax deductions can be calculated accordingly.

Who is responsible for determining IR35 status?

Responsibility for IR35 depends on the size and type of the organisation engaging the contractor.

• Public sector bodies must determine whether a role falls inside or outside IR35 and issue a Status Determination Statement.
• Medium and large private sector organisations must do the same under the off-payroll working rules.
• Small private sector companies are exempt from the off-payroll rules. In these cases, responsibility for assessing IR35 status sits with the contractor’s limited company.

From April 2026, the thresholds used to define a small company will increase. Organisations should review their size classification regularly to ensure IR35 responsibility is correctly allocated.

What’s changing from 2025 to 2026?

IR35 legislation continues to evolve, and there are several important updates that contractors, hiring managers and agencies need to understand.

1. Small company thresholds increase from April 2026

From 6 April 2026, the definition of a “small” company will change. A business will be classed as small if it meets two of the following three criteria:

• Annual turnover of £15 million or less
• Balance sheet total of £7.5 million or less
• 50 employees or fewer

This is an increase from the previous turnover and balance sheet thresholds.

Why this matters

If the end client is classed as small, the off-payroll IR35 rules do not apply. Responsibility for determining IR35 status remains with the contractor’s limited company, rather than the client.

This means some organisations will move out of scope of the off-payroll rules from April 2026, which could shift compliance responsibility back to contractors.

2. Protection against double taxation from April 2025

From April 2025, HMRC introduced changes designed to prevent double taxation in IR35 disputes.

If HMRC later determines that a contract was inside IR35, tax already paid by the contractor’s limited company can be offset against the client or fee-payer’s liability.

This reduces the financial risk of retrospective IR35 assessments and provides greater fairness across the supply chain.

3. New liability rules for umbrella company supply chains from April 2026

From April 2026, new legislation will introduce joint liability across labour supply chains where umbrella companies are used.

If an umbrella company fails to pay the correct PAYE or National Insurance, HMRC will have the power to recover unpaid tax from:

• The recruitment agency, or
• The end client where no agency is involved

This significantly increases the importance of due diligence when selecting umbrella partners and strengthens compliance expectations across the recruitment chain.

How to stay compliant with IR35 in 2026 and beyond

With further changes coming into effect in 2025 and 2026, it is important to take a proactive approach to IR35 compliance. Whether you are a contractor, hiring manager or agency, clarity and due diligence are essential.

To reduce risk and ensure compliance:

• Confirm whether the end client falls inside or outside the small company exemption before the assignment begins.
• Ensure any Status Determination Statement is clear, evidence-based and reflects the reality of the working arrangement.
• Review both the written contract and the day-to-day working practices to ensure they align.
• Carry out thorough due diligence on umbrella companies within the labour supply chain.
• Seek specialist tax or legal advice where IR35 status is unclear or high risk.

Taking these steps early will help prevent disputes, reduce financial exposure and provide greater confidence for everyone involved in the engagement.

Find out more

If you would like to know more about IR35 and how to ensure that your recruitment activities are fully compliant with all relevant tax and national insurance rules, get in touch with Sellick Partnership today.