Off-payroll working — the regime everyone still calls "IR35" — is now eight years into the public sector reform and five into the private sector extension. The compliance dust has settled, but enforcement activity has not. HMRC's 2024/25 figures showed a 38% year-on-year increase in IR35 status determinations being challenged, and the agency has continued to focus on large engagers, financial services, and the IT contractor market. If you sit on either side of a contractor relationship, the rules in 2026 demand careful attention.
Who is responsible for the determination?
The single biggest practical question under the off-payroll rules is: who decides whether IR35 applies?
- End client is a "small" company (meets at least two of: turnover ≤ £10.2m, balance sheet ≤ £5.1m, employees ≤ 50): the personal service company (PSC) decides. This is the original IR35 from 2000.
- End client is medium or large: the end client must issue a Status Determination Statement (SDS), and the fee-payer in the chain (which may be a recruitment agency) deducts PAYE and NIC if the determination is "inside IR35".
One common mistake: end clients applying the medium/large rules to themselves when they actually qualify as small. The thresholds shifted upwards in April 2025, so some companies that previously had to determine status no longer do. Check your latest filed accounts.
The three pillars of status
Whether an engagement is inside or outside IR35 hinges on three case-law tests that have not fundamentally changed since Ready Mixed Concrete in 1968:
- Mutuality of obligation: is the engager obliged to offer work, and is the contractor obliged to accept it? If yes to both, that points towards employment.
- Control: who decides how, when, where, and what work is done? Strong client control points towards employment.
- Personal service vs substitution: must the contractor provide the service personally, or can they substitute another suitably qualified individual? A genuine, unfettered right of substitution is a strong outside-IR35 indicator.
Secondary factors — financial risk, provision of equipment, being part of the organisation — also matter. CEST (HMRC's Check Employment Status for Tax tool) is not always reliable; HMRC themselves have said they will stand by a CEST result only where the questions were answered truthfully and the working practices actually match.
What "reasonable care" looks like
Engagers must take "reasonable care" in issuing a Status Determination Statement. Blanket determinations (treating every contractor as inside, or every contractor as outside) explicitly do not meet the standard. HMRC has used this to invalidate determinations and shift the PAYE liability up the chain to the end client. A defensible SDS process involves:
- Individual review of each contract and working practice.
- Documented reasoning citing the case-law factors.
- A disagreement process for contractors who dispute the outcome (statutory requirement: a 45-day response window).
- Periodic re-review when contract terms or working practices change.
The PSC perspective
If you operate via a personal service company and your engagement is determined inside IR35 by a medium/large client, the fee-payer will deduct PAYE and employee NIC before paying your PSC. The amount received by your PSC is effectively net of those deductions, and you can extract it as a "deemed payment" without further income tax — but Corporation Tax may apply on margins and you lose much of the original tax efficiency of the PSC structure.
Many PSCs in 2026 are reviewing whether the company is still worth keeping. The answer depends on a mix of factors: residual contracts that are outside IR35, expense reimbursement, dividend timing on retained reserves, and exit planning. Our tax planning team regularly runs these reviews; the conclusion is rarely binary.
Enforcement trends to watch in 2026
HMRC's compliance teams have published guidance signalling a focus on:
- Financial services and consultancy engagements with rolling contracts longer than 24 months.
- "Outside IR35" determinations where the contractor previously worked as an employee for the same client.
- Group structures where the determination is made by one entity but the work is performed for an affiliate.
Practical action items
- If you are an engager: audit the SDS process. Spot-check 10% of current determinations.
- If you are a contractor: keep a written contract review and a working-practices statement for every engagement.
- If you are mid-enquiry: get specialist representation early. HMRC enquiries can run for two to three years and the difference between a well-defended case and a poorly defended one is often six-figure.
For engagers needing a complete IR35 audit, or contractors requiring contract review and working-practice documentation, book a discovery call or reach our team via the contact page. We also offer ongoing business advisory support for organisations that engage large numbers of contractors and want a defensible system in place rather than a one-off review.