The UK\u2019s IR35 regime, also known as the off-payroll working rules, continues to play an important role in how businesses engage contractors operating through personal service companies. Since the IR35 reforms for the private sector in April 2021, medium and large entities have borne responsibility for determining a contractor\u2019s tax status and, where relevant, operating Pay As You Earn (PAYE) and National Insurance contributions (NICs).<\/p>\n
Starting on 6 April 2026, the financial thresholds used to determine whether an end user (that is, the organisation receiving the contractor\u2019s services) is classified as small, and therefore exempt from the 2021 IR35 reforms, will increase. Accordingly, some companies currently within scope of IR35 will fall outside the regime at the start of the 2026-2027 tax year.<\/p>\n
This GT Alert summarises the current IR35 framework, the upcoming changes, and the potential impact on both organisations and contractors.<\/p>\n
Current Legal Framework<\/p>\n
IR35 is a tax regime designed to prevent disguised employment where an individual provides services to an end user through an intermediary, usually a personal service company (PSC), but would be regarded as an employee for tax purposes if engaged directly.<\/p>\n
Since April 2021, the UK has required that medium and large private sector end users:<\/p>\n
Assess whether IR35 applies to each engagement;
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\nExercise reasonable care in doing so;
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\nIssue a Status Determination Statement (SDS), setting out the reasons for the conclusion, to the contractor and any agency involved before the first payment is made; and
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\nProvide a process for the contractor or agency to challenge the determination.<\/p>\n
Under current regulations, where IR35 applies, the fee payer, which may be the end user or an agency, must deduct PAYE and employee NICs from payments to the PSC. The fee payer must also pay employer NICs and any apprenticeship levy. If an end user fails to take reasonable care or does not issue an SDS, His Majesty\u2019s Revenue and Customs (HMRC) may transfer liability for the tax and NICs to the end user.<\/p>\n
Small private sector end users are exempt from the 2021 reforms. Where the exemption applies, the PSC remains responsible for determining status and paying tax under the original IR35 rules.<\/p>\n
IR35 applies only for tax purposes and does not alter a contractor\u2019s employment status for employment law purposes, though the criteria used to determine employment status are similar to those applicable to the tax assessment.<\/p>\n
Determining Employment Status<\/p>\n
To assess whether IR35 applies, end users must consider whether the contractor would be regarded as an employee for tax purposes if they were hired directly. This requires examining both the contractual terms and the working practices. Key factors include:<\/p>\n
The level of control the end user exercises over how, when, and where the contractor works;
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\nWhether the contractor has a genuine and practical right of substitution;
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\nWhether there is an obligation to offer and accept work;
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\nThe degree of integration into the end user\u2019s business; and
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\nWhether the contractor is operating a genuine business on their own account, including financial risk and provision of equipment.<\/p>\n