IR35 has been part of the tax conversation for years, but it still raises practical questions for contractors and hiring businesses alike. If you’re a South London small or medium-sized enterprise (SME), whether you run a consultancy, a bar or a retail chain, the rules affect how you engage people and how you price work. Get the status wrong and costs mount fast. Get it right and everyone has clarity. This article sets out the main IR35 considerations for the 2025/26 tax year, how status decisions are made, what’s changed recently and the steps we recommend to reduce risk.
We keep this advice grounded. Day to day, we help clients review contracts, check working practices and document decisions. We also see the other side: contractors who want to protect their rate, manage cashflow and avoid unexpected PAYE deductions. With more than four million people working for themselves, the UK’s flexible workforce is a big part of the economy (ONS, 2025). Clear, consistent IR35 processes help you keep projects moving and avoid disputes. We’ll also touch on HMRC’s Check Employment Status for Tax (CEST) tool and the 2024 “set-off” change that matters if HMRC later decides an engagement was inside IR35.
What IR35 means in practice
IR35 (the off-payroll working rules) tests whether a worker, supplying services via their own limited company or other intermediary, would be an employee for tax if they were engaged directly. If the rules apply, PAYE and Class 1 national insurance contributions (NICs) are due on the fees paid for the work.
Who decides? In the public sector and in the private sector where the client is medium or large, the client must determine status and issue a status determination statement (SDS). Where the client is a “small” company under the Companies Act, the worker’s personal service company (PSC) usually makes the decision and carries the risk. Agencies can be the deemed employer for PAYE if they sit in the supply chain.
Who decides status – and what a good process looks like
A sound process does three things: it gathers the right facts, it records the decision and it handles challenges promptly.
- Collect evidence: Contracts, statements of work, onboarding emails and working-practice notes.
- Issue an SDS: A clear “inside” or “outside” conclusion with reasons, shared with the worker and the next party in the chain.
- Operate a dispute route: Review new facts, respond in writing and keep timing tight so the project isn’t delayed.
HMRC expects the status to be determined per engagement. If the work changes, reassess.
Key status tests you should document
These tests come from case law and HMRC guidance. Capture the reality of the engagement, not just the paperwork.
- Substitution: A genuine, practical right for the worker to send someone equally qualified, with minimal client veto.
- Control: Who decides what work is done, where, when and how – the more client control, the more “employment-like”.
- Mutuality of obligation: Whether there is an ongoing expectation to offer and accept work beyond the project scope.
- Financial risk: Evidence of fixed-price work, rework at own cost or providing own equipment and insurances.
- Part and parcel: Signs that the worker is embedded – line management, appraisals or perks – point towards employment.
- Business on own account: Multiple clients, own brand, website, marketing and the ability to profit or make a loss.
What’s new for 2025/26: The IR35 set-off and a refreshed CEST
Two recent changes matter this year.
- Set-off from April 2024: Where HMRC finds non-compliance under the off-payroll rules and raises PAYE on the deemed employer, it can now set off certain taxes already paid by the worker or their PSC on the same income – for example, corporation tax, dividends tax and the worker’s NICs. This reduces double taxation in settlements from 6 April 2024, with scope back to when the off-payroll rules first applied in each sector. You’ll still owe secondary Class 1 NICs and apprenticeship levy where due, as these are not offset (HMRC, 2025).
- CEST update (30 April 2025): HMRC simplified the CEST guidance and still says it will stand by results when inputs are accurate and the facts reflect working practices. Use it to aid decisions, save or print the result and revisit if the work changes (HMRC, 2025).
Small company exemption – what to check
In the private sector, if the client qualifies as “small” under the Companies Act, the PSC decides status and accounts for any PAYE/NIC if the work is inside IR35. Size is assessed by reference to the prior financial year and applies for the whole tax year. Some Companies Act thresholds are changing, but for off-payroll working this look-back means most practical effects won’t bite in 2025/26. The safe move is to confirm your size status each year and document the basis for it.
Practical steps to reduce IR35 risk
For hiring businesses
- Role design: Define output and deliverables, not hours and supervision.
- Contract terms: Align words with working practice, including a workable substitution clause and project-based milestones.
- SDS quality: Explain reasons, reference facts and avoid generic wording.
- Supply chain: Map who pays whom and ensure agencies understand their responsibilities.
- Review cadence: Reassess when the scope shifts or the engagement rolls into a new phase.
For contractors
- Working practices: Maintain independence – avoid managerial duties, use your own tools where feasible and show control over “how” work is done.
- Business footprint: Keep evidence of multiple clients, marketing, insurances and financial risk.
- Paper trail: Save CEST outputs and SDS documents, plus statements of work and change notes (HMRC, 2025).
A quick word on umbrellas and agencies
If you are employed by a compliant umbrella company and paid through PAYE, the off-payroll rules generally won’t apply to that engagement. Where agencies are involved, ensure everyone knows who the deemed employer is, how the SDS will be shared and when PAYE will be operated if the role is inside IR35.
What it means for take-home pay and cashflow
Inside IR35, the deemed employer must deduct income tax and employee NICs from the “deemed direct payment” to the PSC, and account for employer NICs and (where relevant) the apprenticeship levy. For contractors, that can mean a lower net compared with a genuine outside-IR35 role. Budget for the impact and make sure your rate reflects the status. For clients, factor in employer NICs early so projects are priced correctly. Good documentation reduces disputes, protects relationships and keeps delivery on track.
How we can help, and next steps for your IR35 considerations
We’ve kept this straightforward for busy owners and contractors across Croydon and South London. The aim is to help you make confident, repeatable decisions. With around 4.3-4.4m self-employed people in the UK, having a clear approach to status protects both sides and keeps work flowing.
Here’s how we support clients.
- Status reviews: Practical, written reviews of roles and contracts, with clear “inside” or “outside” opinions and the reasoning to back them up.
- Process design: Templates for SDS, dispute handling and supply-chain checks you can operate without fuss.
- Engagement by engagement: Light-touch reviews at renewals, so decisions stay current when scopes evolve.
- Contractor support: One-to-one sessions for PSCs on rate setting, insurances, expenses and record-keeping.
We’re here to keep things calm and practical. For help with reviews, contracts or training your team, see our pages for IT contractors, our business tax support, or go straight to contact us. If you’d like a no-pressure conversation about IR35 considerations, get in touch and we’ll talk it through.