The off-payroll working rules are HMRC tax law. They decide if contractors who work through their own company must pay tax as employees. Since April 2021, medium and large end-clients decide IR35 status. Contractors do not decide. This changed how the market works. This guide explains what it means for everyone in the chain.
What are the off-payroll working rules?
The off-payroll working rules require businesses to check if their contractors are really self-employed. If they are not, the fee-payer must deduct income tax and NIC. They deduct as if the contractor is an employee. The rules sit in ITEPA 2003. Chapter 10 covers medium and large clients. Chapter 9 covers small clients.
The original IR35 rules started in 2000. Contractors had to check their own status through their personal service company (PSC). Most did not do it. Or they got it wrong. HMRC collected far less tax than it should have.
The off-payroll working reforms changed who makes the decision:
- Medium and large private sector clients: the end-client decides status (Chapter 10, from April 2021)
- Public sector clients: the end-client has decided since April 2017
- Small private sector clients: the contractor’s PSC still decides (Chapter 9)
Read what is IR35 for the background on the original rules. It also explains what inside and outside IR35 means for your take-home pay.
What is Chapter 10 (medium and large clients)?
Chapter 10 of ITEPA 2003 requires medium and large businesses to issue a Status Determination Statement (SDS). They must issue one for each contractor they engage through a PSC. The SDS states if the engagement is inside or outside IR35. It also gives the reasons. If inside, the fee-payer must operate PAYE. The fee-payer is usually the agency.
The Companies Act defines medium and large. Two of these three must apply: annual turnover above £10.2m, balance sheet above £5.1m, or more than 50 employees. If any two are true, Chapter 10 applies.
The fee-payer receives the SDS from the end-client. The fee-payer is usually the recruitment agency. If the determination is inside IR35, the fee-payer deducts income tax and employer NIC. They deduct from the contractor’s limited company invoice. The PSC receives the net amount.
This is expensive and complicated. That is why most inside-IR35 contractors now use umbrella companies instead.
What is Chapter 9 (small clients)?
Chapter 9 applies when the end-client is a small business. Small businesses do not have to follow the off-payroll rules. The PSC itself must decide if the engagement is inside or outside IR35. The responsibility has not shifted.
Contractors working through PSCs for small clients still check their own status. If inside IR35, they pay the tax from the PSC. If outside, they can pay themselves through dividends. This is the same as before.
The practical result is simple. Contractors at small clients still handle IR35 themselves. The 2021 reform only shifted responsibility for medium and large clients.
What is a Status Determination Statement (SDS)?
An SDS is a written document from the end-client. It sets out three things. First, the conclusion: inside or outside IR35. Second, the reasons for that conclusion. Third, the client must offer a disagreement process. The SDS is a legal requirement under Chapter 10. Without it, the end-client becomes the fee-payer. The end-client then carries the tax liability.
The SDS must go to the contractor and the fee-payer. Both get the same document. If the contractor disagrees, they can raise a formal dispute. The end-client must respond within 45 days.
HMRC’s CEST tool is the official tool for SDS determinations. CEST stands for Check Employment Status for Tax. It is not perfect. Its undetermined outcomes cause problems. But it gives most clients a defensible starting point.
What is a Statement of Work (SoW) and does it help?
A Statement of Work contract defines deliverables. It does not define working hours. If designed correctly, it can move a contractor outside the off-payroll rules. The end-client does not direct how the work is done. They only say what they want delivered. But a poorly written SoW does not remove IR35 risk.
HMRC looks at the real working arrangements. They do not just look at the contract. An SoW may say deliverable-based. But if the client directs the work every day, the contractor is still inside IR35. Fixed hours and team integration also point to inside IR35. The real situation matters more than the contract.
A genuine SoW has these features. It is output-based. The contractor controls their own methods. The contractor can send someone else to do the work. The client has limited supervision rights. If the real situation does not match this, the SoW gives little protection.
Why do most inside-IR35 contractors use umbrella companies?
When an engagement is inside IR35, the simplest route is an umbrella company. The umbrella employs the contractor directly under PAYE. You do not need an SDS. You do not need a PSC. There is no complex fee-payer chain. The umbrella handles all deductions correctly from day one.
This is why umbrella use grew fast after the 2021 reform. Agencies found it simpler to place inside-IR35 contractors through umbrellas. It was harder to manage SDS obligations and fee-payer deductions for PSC contractors.
For contractors, umbrella PAYE is simpler too. But it means lower net pay than an outside-IR35 limited company. Read umbrella vs limited company if you are weighing the options.
An IR35 umbrella company that processes PAYE correctly handles everything. It handles deductions, payslips, holiday pay, and pension auto-enrolment. You focus on the assignment. You do not worry about payroll.
What should contractors know about inside-IR35 contracts?
Check the SDS before you accept the contract. If the SDS says inside IR35, your take-home through a PSC will be similar to PAYE. So an umbrella makes things simpler. If the SDS is missing, that is a red flag. The end-client may be avoiding their legal duties.
Key checks:
- Ask for the SDS before you sign any inside-IR35 contract
- If inside, compare the net cost of a PSC vs. an umbrella. The umbrella company take home calculator shows the numbers for your day rate
- Check if the end-client used HMRC CEST or another assessment tool
- If you disagree with an inside decision, use the client’s formal disagreement process
Frequently asked questions
What are the off-payroll working rules?
The off-payroll working rules are in Chapter 10 of ITEPA 2003. They require medium and large businesses to check if contractors are inside IR35. The check applies to contractors who work through a personal service company. If inside, the fee-payer must deduct income tax and NIC before paying the PSC. The fee-payer is usually the agency.
What is the difference between Chapter 9 and Chapter 10 of ITEPA 2003?
Chapter 10 applies to medium and large clients. They decide IR35 status. The fee-payer runs PAYE. Chapter 9 applies to small clients. The contractor’s PSC decides its own status. A small client means two of these: turnover below £10.2m, balance sheet below £5.1m, or fewer than 50 employees.
What is a Status Determination Statement (SDS)?
An SDS is a written statement from the end-client. It says if the engagement is inside or outside IR35. It also gives the reasons. The SDS is a legal requirement under Chapter 10. It must go to the contractor and the fee-payer. Contractors can dispute it through a formal process.
Why do most inside-IR35 contractors use umbrella companies?
Umbrella PAYE is simpler than the fee-payer chain for inside-IR35 PSC contractors. You do not need an SDS. There are no complex deductions between the agency and the PSC. The umbrella employs the contractor directly. It handles all PAYE obligations.
Does a Statement of Work contract remove IR35 risk?
Only if the real working arrangements match the SoW. A deliverable-based contract can be outside IR35. The contractor must control their own methods. They must be able to send a substitute. They must not be part of the client’s team. A nominal SoW does not remove the risk. If the client still directs the daily work, the risk stays.
