Am I inside or outside IR35 in 2026/27? The IR35 rules explained
By Hussein Bhaiji FCCA CTA, Managing Partner. Last reviewed: October 2026.
Your end client tells you the off-payroll working rules no longer apply, because it has become a small company. It sounds like good news, and an end to the question of whether you are inside or outside IR35. It might even be right. But the size test decides who carries the risk. If the client really is small, and it withdrew any earlier Status Determination Statement before the tax year began, the off-payroll rules do not apply and your own company must apply the original IR35 rules in Chapter 8 of Part 2 ITEPA 2003, with any liability falling on your company. A client that issued a Status Determination Statement and then becomes small must tell you, before the start of the tax year, that it no longer qualifies as medium or large and that the statement is withdrawn. If it does not, section 61TA ITEPA 2003 treats it as medium or large for that whole year, and it remains the fee payer. If the client is in fact medium or large and has simply got the size test wrong, it will not have issued a Status Determination Statement, and section 61N(5) ITEPA 2003 treats the client itself as the fee payer, so the liability stays with the client. So are you inside or outside IR35, and who is actually responsible for deciding in 2026/27?
Who decides your status?
It depends entirely on the size and type of the client you are working for.
Public sector clients of any size, and medium or large private sector clients, must determine your status themselves and issue a Status Determination Statement. If the statement says the engagement is inside the rules, the fee payer, usually the agency, then deducts PAYE and National Insurance from the payment.
Small private sector clients are exempt. Responsibility falls back to your own limited company, which has to consider the original IR35 rules itself. Wholly overseas clients with no UK connection are treated the same way.
Warning
Notice what that means. When a client is small, being told “IR35 does not apply here” is not a determination you can rely on. It means nobody has determined anything, and the obligation is yours. Those are very different statements and they are routinely confused.
What counts as a small client for IR35, and did the thresholds change?
They did, and this is where many clients are getting it wrong for 2026/27.
The Companies Act small company thresholds increased for financial years beginning on or after 6 April 2025. The table shows the limits a company has to exceed to count as medium or large:
| Criterion | Financial years beginning before 6 April 2025 | Financial years beginning on or after 6 April 2025 |
|---|---|---|
| Turnover | more than £10.2 million | more than £15 million |
| Balance sheet total | more than £5.1 million | more than £7.5 million |
| Employees | more than 50 | more than 50 |
A corporate client is medium or large if it exceeds at least two of the three. Group membership changes this. A subsidiary cannot be small if its parent undertaking is not (section 60C ITEPA 2003), and a parent company is judged on the figures for its whole group. A small trading company owned by a large group is therefore medium or large for these rules. Because section 60A ITEPA 2003 applies the Companies Act small companies regime, the two-year rule in section 382(2) Companies Act 2006 applies too: a company’s size only changes once it has crossed the line in two consecutive financial years. A transitional provision (regulation 3 of SI 2024/1303) lets a company judge its earlier years against the new thresholds as well, so from 2027/28 some clients will become small without waiting for a second year (ESM10006A).
Now the timing, which is what matters. Company size for a tax year is tested against the last financial year whose deadline for filing accounts at Companies House ended before that tax year starts (section 60A(4) ITEPA 2003). For a private company with a normal 12-month year, that deadline is nine months after the year end. Because of that lag, HMRC states that for a normal 12-month financial year, the earliest tax year the new thresholds can affect is 2027/28.
Note
So for 2026/27, most corporate clients are still tested against the old limits of £10.2 million turnover and £5.1 million balance sheet total. The 50-employee limit is unchanged. If a client says it became small because “the thresholds went up”, that is very probably wrong for this tax year.
What if the client is not a company?
A simpler test applies. An unincorporated client, such as a partnership or a sole trader, is medium or large if its turnover alone exceeds the Companies Act turnover limit. A partnership is tested on its last financial year ending at least nine months before the tax year begins (section 60E ITEPA 2003); a sole trader or other individual is tested on turnover for the last calendar year before the tax year (section 60F). Both sections use the Companies Act figure “for the time being” in force, which has been £15 million since 6 April 2025. HMRC’s guidance at ESM10006 still quotes £10.2 million, and ESM10006A says unincorporated clients are not affected by the change. An unincorporated client with turnover between £10.2 million and £15 million that treats itself as small should expect HMRC to challenge it. There is no balance sheet test, no employee test and no two-year rule. Turnover of connected persons is added in, though (section 60G ITEPA 2003), so a sole trader or partnership connected with other businesses can be medium or large even when its own turnover is under the limit.
A partnership and a limited company with identical turnover can fall on opposite sides of the line, because the company is judged on two of three tests and the partnership on turnover alone. An LLP is not in this group: it is tested in the same way as a company (section 60D ITEPA 2003).
What is a Status Determination Statement?
Where the client is responsible, it must give you a written statement that states its conclusion on your status and the reasons for it. It has to pass that statement to you and to the party it contracts with, so it cascades down the chain, and it must be produced with reasonable care.
If the client fails to take reasonable care, fails to pass the statement on, or gives no reasons, the liability stays with the client rather than moving down the supply chain.
How do you challenge a Status Determination Statement?
Through the client-led disagreement process. You can dispute the determination up until the final payment for your services. The client then has 45 days from receiving your representations to either issue a new statement withdrawing the original, or confirm the original with reasons. If it does not respond within 45 days, the client is treated as the fee payer from the end of that period until it does respond (section 61T ITEPA 2003).
There is no appeal to HMRC and no tribunal on this. The process begins and ends with the client, which is why the quality of your written representations matters far more than most contractors realise.
What actually decides whether you are inside or outside?
The test asks whether, if you were engaged directly rather than through your company, you would be an employee. The established factors are personal service and the right of substitution, control over how, when and where you work, and mutuality of obligation. The starting point is Ready Mixed Concrete (South East) Ltd v Minister of Pensions [1968] 2 QB 497, and the Supreme Court confirmed in HMRC v Professional Game Match Officials Ltd [2024] UKSC 29 that mutuality of obligation and control can be satisfied engagement by engagement, even where there is no obligation to offer or accept future work. Contractual wording matters, but what happens in practice matters more. The Gary Lineker case turned on structure rather than status. Lineker signed the BBC and BT Sport contracts himself, so the First-tier Tribunal held that IR35 could not apply (Lineker v HMRC [2023] UKFTT 340 (TC)). HMRC appealed, but the case settled in November 2024, before the Upper Tribunal hearing.
Example
A consultant bills £480 a day, roughly £110,000 a year through his company. Outside the rules he takes a salary of £12,570 with the balance as dividends (no other income, no pension, no expenses claimed, and all profit paid out). Inside the rules, the fee payer deducts PAYE and employee National Insurance from the deemed payment, and employer National Insurance is due on top. At 2026/27 rates the annual gap is narrower than most people expect. Outside the rules he keeps about £69,900 after corporation tax and dividend tax. Inside, he keeps about £66,400 if the rate is cut to absorb employer National Insurance, or about £72,400 if the fee payer bears it on top. The real exposure is not the annual swing. If the client genuinely is small, the Chapter 8 liability sits with his company, and HMRC can go back several years, with interest and penalties, if it later decides the engagement was inside. If the client was in fact medium or large, the liability stays with the client (section 61N(5) ITEPA 2003).
Tip
If HMRC finds that a fee payer should have operated PAYE, it can set off income tax and National Insurance the worker has already paid on that income, and corporation tax the company has paid, against the fee payer’s PAYE bill. This applies where the trigger event, such as an HMRC determination, happens on or after 6 April 2024. It does not cover employer National Insurance, either the amount your company paid or the amount the fee payer owes, and penalties are still worked out on the liability before set-off.
HMRC’s online Check Employment Status for Tax (CEST) tool asks about substitution, control, financial risk and how far the worker is part of the client’s business, and gives a result of inside or outside, or says it cannot decide. HMRC says it will stand by the result if the information entered is accurate and the tool is used in line with its guidance. It does not ask about mutuality of obligation, which HMRC treats as present in every engagement. After the PGMOL decision that is defensible within a single engagement, but CEST still gives no weight to how much is owed on each side, so its result can be wrong where that point decides the case.
What should you do next?
Ask any client claiming to be small which financial year it is relying on and which thresholds it applied. You are entitled to an answer. Under section 60H ITEPA 2003 you, or your agency, can ask the client in writing to state whether it considers itself small for a given tax year, and it must reply within 45 days. Ask, too, whether it sent you a withdrawal statement before 6 April 2026. If it did not, section 61TA keeps it on the hook for 2026/27. Because of the filing-deadline lag, a client relying on the new figures for 2026/27 has almost certainly moved too early.
Keep every Status Determination Statement, and diarise the 45-day clock whenever you challenge one.
Then get the underlying position reviewed properly rather than relying on a contract template. Contract wording alone has lost cases. What wins them is evidence about how the engagement actually ran. We approach this as Chartered Tax Advisers, and our team includes professionals who have worked inside HMRC, so we can tell you how an engagement will look to whoever eventually reviews it.
If you are unsure of your status, or a client has changed its position, speak to a Chartered Tax Adviser. There is more on our contractor accountants page, and a real case where an engager had the size test wrong in our tax saving case studies.
IR35: frequently asked questions
What is the difference between inside and outside IR35?
Inside means the engagement would be employment if you were engaged directly, so income tax and National Insurance are due as if you were an employee. Where the client is in the public sector, or is medium or large, the fee payer deducts them from a deemed direct payment; where the client is small, your own company accounts for them on a deemed employment payment. Outside means it would not, and your company is taxed as a business.
Who decides my IR35 status in 2026/27?
Public sector clients and medium or large private sector clients decide and must issue a Status Determination Statement. For small private sector clients, and clients with no UK connection, your own company decides.
Do the IR35 rules apply to small clients?
Usually, yes. The original IR35 rules in Chapter 8 of Part 2 ITEPA 2003 apply, and your company must apply them and carries the liability. The exception is a client that gave you a Status Determination Statement and did not withdraw it before the tax year began: section 61TA ITEPA 2003 treats that client as medium or large for the year.
How long does a client have to respond to a challenge?
45 days from receiving your representations, under section 61T ITEPA 2003.
Can I work through an umbrella company instead?
Yes. The umbrella employs you and runs PAYE on your pay, so IR35 does not apply, but you are taxed as an employee. From 6 April 2026 the agency, or the end client where there is no agency, is jointly and severally liable for the umbrella’s PAYE, so agencies are restricting which umbrellas they use.