IR35 & compliance guide
IR35, officially the off-payroll working rules, determines whether a contractor working through their own limited company should be taxed like an employee for a given engagement. Get it wrong, and either the contractor or the hiring business can be left facing an unexpected tax bill. This is the conceptual guide: what actually determines status and who's responsible for it. For the specific thresholds and deadlines changing in 2026 and 2027, see the full 2026 update.
What IR35 actually is
IR35 exists to stop “disguised employment”: someone who works like a permanent employee but is paid through an intermediary, usually their own limited company, to avoid PAYE tax and National Insurance. Strip the intermediary out, and if HMRC would consider the relationship one of employment, the engagement falls inside IR35 and has to be taxed accordingly. It doesn't matter what the contract says on paper: HMRC and employment tribunals look at how the engagement actually runs in practice.
The tests that actually matter
No single factor decides status on its own. HMRC weighs the whole working relationship against five tests:
Control
How much say does the client have over what, how, when and where the work gets done? The more direction, the more the engagement looks like employment.
Substitution
Can the contractor genuinely send a substitute to do the work, or must they deliver it personally? A real, unfettered right of substitution is one of the strongest indicators of self-employment.
Mutuality of obligation
Is the client obliged to keep offering work, and the contractor obliged to accept it? Ongoing mutual obligation looks like employment; discrete, deliverable-based engagements don't.
Financial risk
Does the contractor carry any risk (fixed-price work, correcting errors unpaid, providing their own equipment), or are they simply paid for time like an employee?
Integration
Is the contractor embedded in the organisation's structure (reporting lines, appraisals, staff benefits, a company email signature), or clearly operating as an outside business?
Who determines your status
Responsibility depends on the size of the client. For a genuinely small private-sector client, the contractor's own intermediary decides IR35 status under the original rules. For medium and large private-sector clients, and all public-sector bodies, the end client must determine status and issue a Status Determination Statement (SDS) explaining the reasoning, not just the conclusion. Whoever pays the intermediary, the end client or an agency in the chain, is the fee-payer, and must operate PAYE and deduct tax and employee National Insurance if the engagement is inside IR35, plus pay employer NI on top.
Small company thresholds
A private-sector client counts as medium or large, and so takes on the determination itself, if it meets at least two of these three:
- Annual turnover above £15 million
- Balance sheet total above £7.5 million
- More than 50 employees
Meet fewer than two, and the client counts as small: responsibility for the IR35 determination stays with the contractor's own intermediary instead. These are the thresholds effective from 6 April 2026 (up from £10.2m turnover and £5.1m balance sheet); since this looks at the client's previous financial year, most businesses won't actually move between bands until the 2027/28 tax year.
What this means for your engagement
Status changes the shape of the engagement, not just the paperwork. Inside IR35, employment taxes are deducted from the contract value before you're paid, which changes what a given day rate is actually worth to you. The contract / permanent salary calculator shows that arithmetic side by side for both statuses. Verso handles status determinations and compliance correctly on every contract placement we run, so the risk doesn't land on your desk, whichever side of the engagement you're on.