The off-payroll working rules are HMRC tax rules that decide whether contractors working through their own company should be taxed like employees. Since April 2021, medium and large end-clients, not contractors, have been responsible for deciding IR35 status. That changed how the market works. This guide explains what that means for everyone in the chain.
What are the off-payroll working rules?
The off-payroll working rules require businesses that hire contractors to check whether those contractors are genuinely self-employed. If they are not, the fee-payer in the chain must deduct income tax and NIC as if the contractor were an employee. The rules sit in ITEPA 2003, Chapter 10 for medium and large clients and Chapter 9 for small clients.
The original IR35 legislation came into force in 2000. It required contractors’ personal service companies (PSCs) to self-assess whether they were inside or outside IR35. Most did not, or did so incorrectly. HMRC collected significantly less tax than it should have.
The off-payroll working reforms changed who makes the determination:
- For medium and large private sector clients: the end-client decides status (Chapter 10, from April 2021)
- For public sector clients: the end-client has decided since April 2017
- For small private sector clients: the contractor’s PSC still decides (Chapter 9)
Read IR35 rules for the background on the original rules and what being inside or outside IR35 means for 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) for each contractor they hire through a personal service company. The SDS says whether the engagement is inside or outside IR35 and gives the reasons. If it is inside, the fee-payer in the chain, usually the agency, must operate PAYE.
Medium and large is defined by the Companies Act criteria. Two of three must apply: annual turnover above £10.2m, balance sheet above £5.1m, or more than 50 employees. If any two of these are true, Chapter 10 applies.
The fee-payer, usually the recruitment agency, receives the SDS from the end-client. If the contract is inside IR35, the fee-payer deducts income tax and employer NIC from the contractor’s limited company invoice. The PSC receives the net amount.
It’s expensive and complicated. That is one reason many inside-IR35 contractors have moved to umbrella companies instead.
What is Chapter 9 (small clients)?
Chapter 9 applies when the end-client is a small business. Small businesses are exempt from the off-payroll rules. The PSC itself must decide whether the engagement is inside or outside IR35, so the responsibility stays with the contractor.
In a small-client setup, contractors working through PSCs still do their own status assessment. If inside IR35, they pay the tax from the PSC. If outside, they can still pay themselves through dividends.
The practical result is that contractors working for small clients still make their own IR35 decision. The 2021 reform only shifted that responsibility for medium and large clients.
What is a Status Determination Statement (SDS)?
An SDS is a written document issued by the end-client that sets out the conclusion, inside or outside IR35, the reasons for that conclusion, and the client’s right to a disagreement process. It is a legal requirement under Chapter 10. Without it, the end-client becomes the fee-payer and carries the tax liability themselves.
The SDS must go to both the contractor, or their PSC, and the fee-payer, the agency. Both receive the same document. If the contractor disagrees with the SDS, they can raise a formal dispute with the end-client. The end-client must respond within 45 days.
HMRC’s CEST (Check Employment Status for Tax) tool is the official guidance tool for producing SDS determinations. It is not perfect. Its “undetermined” outcomes cause problems in practice, but it still 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 rather than working hours. If it is designed correctly, it can genuinely move a contractor outside the off-payroll rules because the end-client is not directing how the work is done, just specifying what they want delivered. But a poorly drafted SoW does not remove IR35 risk.
HMRC looks at the actual working arrangements, not just the contract. An SoW that says “deliverable-based” but in practice involves daily direction from the client, fixed hours, and integration into the team does not take the contractor outside IR35. The substance matters.
A genuine SoW is output-based, gives the contractor control over methods, allows substitution, and leaves the client with limited supervision. If the reality does not match, the SoW offers little protection.
Why do most inside-IR35 contractors use umbrella companies?
When an engagement is inside IR35, the simplest route is to work through an umbrella. The umbrella employs the contractor directly under PAYE. No SDS is required, no PSC is needed, and there is no complex fee-payer chain. The umbrella handles all deductions correctly from day one.
This is why umbrella use grew sharply after the 2021 reform. Agencies found it simpler to place inside-IR35 contractors through umbrella companies than to manage SDS obligations and fee-payer deductions for PSC contractors.
For contractors, umbrella PAYE is simpler too, but it does mean lower net pay than an outside-IR35 limited company arrangement. Reading which suits your contract is the right next step if you’re weighing the options.
An IR35 umbrella company that processes PAYE correctly handles all deductions, payslips, holiday pay, and pension auto-enrolment, so you can focus on the assignment rather than payroll administration.
What should contractors know about inside-IR35 contracts?
Check the SDS before accepting. If the SDS says inside IR35, your take-home through a PSC will be similar to PAYE anyway, so umbrella simplifies the process. If the SDS is missing or the client cannot provide one, that is a flag. The end-client may be avoiding its obligations.
Key checks:
- Ask for the SDS before signing any inside-IR35 contract
- If inside, compare the net cost of working through your PSC vs. an umbrella. The umbrella company take home calculator makes this concrete for your day rate
- Check whether the end-client used HMRC CEST or a third-party assessment tool
- If you disagree with an inside determination, use the client’s formal disagreement process
FAQs
What are the off-payroll working rules?
The off-payroll working rules in Chapter 10 of ITEPA 2003 require medium and large businesses to decide whether contractors working through personal service companies are inside IR35. If they are, the fee-payer, usually the agency, must deduct income tax and NIC before paying the PSC.
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 and the fee-payer runs PAYE. Chapter 9 applies to small clients. The contractor’s PSC decides its own status. A business counts as small if it meets two of these three tests: 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 that says whether the engagement is inside or outside IR35 and explains why. Chapter 10 requires it. It must be given to both the contractor and the fee-payer, usually the agency. Contractors can challenge it through a formal process.
Why do most inside-IR35 contractors use umbrella companies?
Umbrella PAYE is usually simpler than the fee-payer chain that applies to inside-IR35 PSC contractors. No SDS is needed, and there are no complex deductions between the agency and the PSC. The umbrella employs the contractor directly and handles all PAYE obligations.
Does a Statement of Work contract remove IR35 risk?
Only if the real working arrangement matches the SoW. A deliverable-based contract can be outside IR35 when the contractor controls the method, can send a substitute, and is not integrated into the client’s team. If the SoW is only on paper and the client still directs the day-to-day work, the risk remains.
