31 Jul How does IR35 affect your business if you use contractors or freelancers in 2026?
You may have hired a specialist through their own limited company because you need expertise for a project, not another permanent employee. The difficult part is deciding whether HMRC would view the arrangement in the same way.
Under the IR35 off-payroll working rules for UK businesses using contractors in 2026, medium and large private-sector clients usually have to assess each relevant engagement. If the contractor would look like an employee when their intermediary is removed, the fee-payer must normally operate PAYE and National Insurance. Here is how to make and record that decision.
Need help reviewing contractor arrangements?
CTMP’s accounting, payroll, and tax services can help connect contracts, working practices, status decisions, and payroll. Call us on 0208 776 0200 or email info@ctmp.co.uk.
An outside-IR35 contract is only persuasive when the real working relationship follows it. The strongest decision joins the paperwork, everyday practice, and payment process into one consistent record.
What IR35 means for a UK business in 2026
IR35 is the common name for the UK off-payroll working rules. It aims to ensure people working through an intermediary pay broadly the same tax as employees when they would otherwise be employed.
From 6 April 2021, medium and large private-sector clients generally became responsible for determining the tax status of contractors working through an intermediary. Where the private-sector client qualifies as small, that responsibility normally remains with the contractor’s intermediary.
Revised company-size thresholds apply to financial years beginning on or after 6 April 2025, although the year in which they affect a business’s IR35 obligations can depend on its accounting period and the two-year size test.
How should you determine IR35 status?
No single clause decides status. Consider both the agreement and what happens in practice. Start with three questions:
- Substitution: Can the contractor genuinely send a suitably qualified substitute?
- Control: Who decides how, when, and where the work is completed?
- Mutuality of obligation: Must you keep offering work, and must the individual keep accepting it?
Also consider other relevant employment-status factors, including financial risk and whether the contractor provides significant equipment.
Assess each engagement on its own facts rather than relying on a job title or blanket decision, as HMRC confirms that the off-payroll working rules apply on a contract-by-contract basis.
What is a Status Determination Statement?
A Status Determination Statement, or SDS, records the client’s conclusion on whether the worker would be employed or self-employed for tax purposes if engaged directly. To be valid, it must include the conclusion and the reasons for it, and the client must have taken reasonable care when making the decision.
The client must give the SDS to the worker and the party it contracts with, such as an agency. Simply describing a role or contract as “outside IR35” is not enough. The client must also consider disagreements raised by the worker or deemed employer and normally respond within 45 calendar days. If the SDS is invalid, or the client fails to meet its obligations, responsibility for deducting tax and National Insurance may remain with the client.
Reasonable care generally means gathering relevant facts, considering the actual working arrangements and avoiding blanket decisions based solely on job titles or departments.
Can you rely on HMRC’s CEST tool?
HMRC’s Check Employment Status for Tax tool considers information about the contract and the actual working arrangements, including responsibilities, payment, and who controls what work is done, when, where, and how. HMRC says it will stand by the result provided the information supplied is accurate and the tool is used in line with its guidance.
Keep a copy of the answers and result, as CEST does not retain individual records. Complete the assessment again if there is a material change to the contract or working arrangements. Where the facts are unclear or CEST cannot reach a determination, HMRC says you may seek advice from a suitably qualified tax adviser.
What happens if your business gets IR35 wrong?
When the rules apply, the fee-payer becomes the deemed employer for tax. It must deduct Income Tax and employee National Insurance, pay employer National Insurance where due, and report payments through payroll.
If the client fails to take reasonable care or issue a valid SDS, liability can remain with the client. HMRC may seek unpaid PAYE and National Insurance, plus interest and possible penalties. Managing IR35 liability when using contractors needs clear ownership, reliable records, and regular reviews.
CTMP supports SMEs with payroll, PAYE, tax enquiries, and IR35 enquiries. Our Kent payroll management guidance also covers accurate records and reliable payroll processes.
A practical IR35 compliance process
- Confirm your organisation’s size for the relevant tax year.
- Identify the contractual chain and fee-payer.
- Gather facts from the hiring manager and contractor.
- Assess the whole relationship, using CEST where appropriate.
- Issue and share a reasoned SDS.
- Apply the correct payroll treatment and keep supporting records.
- Review the decision when duties or working arrangements change.
This makes IR35 status decisions for SMEs easier to explain and keeps contracts aligned with reality.
Getting IR35 decisions right in 2026
IR35 does not put every freelancer on payroll. Businesses within scope must assess each engagement and follow the decision through the supply chain.
Start with business size, examine substitution, control, and the wider relationship, then record your reasoning in a valid SDS. A genuine contractor agreement helps, but the day-to-day working practices make the position credible.
Talk through your contractor compliance
For practical IR35 compliance support from a UK accountant, call CTMP on 0208 776 0200 or email info@ctmp.co.uk.
Frequently asked questions
Does IR35 apply to sole traders?
Not in the same off-payroll way. IR35 generally concerns workers providing services through an intermediary, although other employment-status rules may affect sole traders.
Are all freelancers outside IR35?
No. “Freelancer” is a commercial description, not a tax status. The contract and real working relationship determine the answer.
Who pays employer’s National Insurance inside IR35?
The deemed employer pays it. This is usually the fee-payer, and it should not simply deduct this cost from the contractor’s agreed fee.
How often should an SDS be reviewed?
Review it when working arrangements change and periodically during longer engagements. New duties, control, or substitution terms may change the result.
Do small businesses need to ignore IR35?
No. They may not make the Chapter 10 decision, but should confirm their size when asked and still manage employment-status risks.