IR35 for small businesses

Section 01

What IR35 actually is

• If IR35 applies, the contractor's income from that engagement is treated as employment income for tax purposes.
• The contractor pays income tax and National Insurance as if they were an employee, rather than taking dividends.
• The rules do not change the contractor's legal status — they are still self-employed. They change the tax treatment.
• IR35 does not apply to sole traders — it only applies when a contractor operates through a limited company.

Section 02

Who is responsible for the IR35 assessment?

• Small client businesses: the contractor's own limited company is responsible for assessing IR35 status and paying any tax due. This is the original 'Chapter 8' rules.
• Medium and large client businesses: the client business is responsible for assessing IR35 status and, if inside IR35, deducting tax and NI before paying the contractor. This is the 'Chapter 10' off-payroll working rules introduced in 2021.
• From April 2026, the threshold for 'small' has increased — see below.

Section 03

The 2026 small company exemption

• Annual turnover: not more than £15 million (increased from £10.2 million).
• Balance sheet total: not more than £7.5 million (increased from £5.1 million).
• Number of employees: not more than 50 (unchanged).
• If your business qualifies as small, you are not responsible for assessing IR35 status — the contractor's own company is.
• Most UK startups and small businesses will qualify under this exemption.
• If you are unsure whether you qualify, check with your accountant — the thresholds apply to the previous financial year.

Section 04

How to assess IR35 status (if you are a medium/large business)

1. 01

   Assess the three key factors

   The three primary factors are: (1) Substitution — can the contractor send a substitute to do the work? If yes, this points to outside IR35. (2) Control — does the client control how, when, and where the work is done? High control points to inside IR35. (3) Mutuality of obligation — is there an ongoing obligation to offer and accept work? If yes, this points to inside IR35.

2. 02

   Use HMRC's CEST tool

   Run the engagement through HMRC's Check Employment Status for Tax (CEST) tool at gov.uk/guidance/check-employment-status-for-tax. Answer honestly — HMRC will stand behind a CEST result if the information provided was accurate.

3. 03

   Issue a Status Determination Statement (SDS)

   If you are a medium/large business, you must issue a written Status Determination Statement to the contractor explaining your decision and the reasons for it. Keep a copy. The contractor can dispute the determination.

4. 04

   If inside IR35: operate PAYE

   If the engagement is inside IR35, you (or the fee-payer in the chain) must deduct income tax and National Insurance from the contractor's fees and pay them to HMRC via PAYE, just as you would for an employee.

Section 05

Practical tips for small businesses engaging contractors

• Check whether you qualify as a small business — if you do, IR35 assessment is the contractor's responsibility, not yours.
• Use a written contractor agreement that reflects genuine self-employment — substitution clause, no mutuality of obligation, contractor controls how work is done.
• Do not treat contractors like employees in practice — if they work fixed hours, use your equipment, and cannot send a substitute, a tribunal may find they are employees regardless of the contract.
• Keep records of the working arrangements — if HMRC investigates, evidence of genuine self-employment is your best defence.
• If in doubt, get an employment status opinion from a specialist — the cost of getting it wrong is far higher than the cost of getting advice.