IR35 and contractor status: what an engaging business must do

Employee, worker and self-employed

Employment law recognises three positions, and a person engaged as a contractor can turn out to be in any of them.

Section 230 of the Employment Rights Act 1996 defines an employee as an individual who has entered into or works under a contract of employment, which is a contract of service or apprenticeship, whether express or implied, oral or in writing. Employees have the full range of rights: unfair dismissal, redundancy pay, statutory notice, family leave and the rest.

The same section defines a worker as an individual who works under a contract of employment or under any other contract by which they undertake to do or perform personally any work or services for another party, where that party is not a client or customer of a profession or business carried on by the individual. Every employee is a worker, and a worker who is not an employee still has the rights that attach to worker status, including the national minimum wage, paid holiday under the Working Time Regulations, protection from unlawful deductions and whistleblowing protection.

The genuinely self-employed contractor is somebody in business on their own account, whose engaging business is a client or customer of that business. They have the contract and nothing else.

What Uber v Aslam decided

Uber BV v Aslam [2021] UKSC 5, decided by the Supreme Court on 19 February 2021, is the case an engaging business should read first, because it settled how the question is approached.

Uber's written terms described the drivers as independent contractors providing services to passengers, with Uber as their booking agent. The Court refused to treat those terms as the starting point. Employment legislation exists to protect people who are in a position of subordination to and dependence on the business they work for, and if the business could decide status by drafting, the protection would be defeated by the very people it was aimed at. The written contract is one piece of evidence about the real relationship, and terms that purport to exclude statutory rights are void.

The Court then looked at what Uber controlled: it set the fares, so drivers could only earn more by working longer; it imposed the contract terms; it controlled whether drivers could refuse trips, through ratings and automatic log-offs; it directed the service through the app and used passenger ratings to manage performance; and it prevented drivers from building any relationship with passengers. Those five factors showed drivers working for Uber, and the drivers were workers.

For an engaging business the lesson is direct. If the business sets the price, dictates the terms, penalises refusal of work, manages performance and keeps the customer relationship, the contractor label will not hold.

The separate tax test

Running alongside employment law is a separate question with a separate answer: how the payment is taxed. The off-payroll working rules, commonly called IR35, are in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003. They apply where a worker provides services to a client through an intermediary, usually the worker's own limited company, and the worker would have been an employee for tax purposes if engaged directly.

Where the rules apply, the client, or the agency paying the intermediary, has to deduct income tax and National Insurance from the payment as if the worker were an employee. The worker does not become an employee in employment law, and the client's liability is a tax liability.

The two tests use overlapping factors, since the tax rules ask a hypothetical employment law question, and they are decided by different bodies for different purposes. HMRC decides the tax question and can assess the client for unpaid tax; an employment tribunal decides the status question if the worker brings a claim. A contractor can be inside IR35 for tax and, for employment rights, a worker without being an employee. An engaging business has to be right on both.

Which clients the off-payroll rules apply to

The client's responsibility for deciding status depends on its size. The rules have applied to public sector clients since 2017 and to medium and large private sector clients since 6 April 2021. A small private sector client is outside them, and where the client is small the responsibility for deciding status stays with the worker's own company under the older rules.

Section 60A of the Act defines small by reference to the Companies Act 2006. A company qualifies as small for a tax year if the small companies regime under that Act applied to it for the last financial year whose filing period ended before the tax year began. The Companies Act test, in section 382, is that the company meets two of three conditions in two consecutive financial years: turnover, balance sheet total and average number of employees below the thresholds.

The thresholds in section 382 were raised for financial years beginning on or after 6 April 2025, to turnover of not more than £15 million and a balance sheet total of not more than £7.5 million, with the employee figure unchanged at 50. Because section 60A looks back to the last financial year for which the filing period has ended, and because the two-year rule has to be met on the new figures, HMRC's Employment Status Manual states that the earliest tax year the new figures can affect for the off-payroll rules is 2027/28. For the current tax year, HMRC's guidance continues to test small against turnover of more than £10.2 million, a balance sheet total of more than £5.1 million and more than 50 employees, with a client that meets two of those being medium or large.

A client that is not a company, such as a partnership or a sole trader, applies a simpler test: it is within the rules if its turnover in the last calendar year exceeded £10.2 million. A newly incorporated company is treated as small for its first financial year and remains so until the first tax year after the filing period for those first accounts has ended.

The status determination statement

A client within the rules has to decide, for each engagement, whether the worker would have been an employee if engaged directly, and give the worker and the party it contracts with a status determination statement setting out the conclusion and the reasons for it. Section 61NA provides that a statement made without reasonable care is not a status determination statement at all, which means the client keeps the tax liability as if it had said nothing.

Reasonable care means looking at each engagement on its own facts. A blanket answer applied to every contractor fails the test. HMRC's Check Employment Status for Tax tool can be used, and HMRC says it will stand by the result where the answers given were accurate, which puts the weight on the answers.

Section 61T gives the worker, or the deemed employer, the right to disagree. The client then has 45 days from receiving the representations to either confirm its conclusion with reasons or issue a new statement with a different one. A client that misses the 45 days becomes responsible for the tax and National Insurance until it complies.

What the contractor agreement should say

A written agreement is worth having, and it decides less than the people signing it believe. A tribunal, following Uber, will look through the document to the reality, and HMRC will do the same for tax. What the document can do is record accurately how the parties have agreed to work, so that the reality and the paper match.

The agreement should describe the services as a defined piece of work or a defined outcome. A job title points towards employment. It should say that the contractor decides how, when and where the work is done, subject to reasonable requirements about deadlines and site access. It should give a genuine right of substitution, with the contractor responsible for paying and briefing the substitute. It should say that the client need not offer further work and the contractor need not accept any that is offered. It should allocate the contractor's own equipment, insurance and correction of defective work at their own cost, and it should provide for payment on invoices for delivered work. A fixed sum paid on the same day as the payroll looks like salary.

A clause stating that the contractor is not an employee, or that nothing in the agreement creates employment, adds nothing on its own. Where the rest of the arrangement points to employment, the clause is one of the terms the Supreme Court said cannot be relied on.

Substitution, control and mutuality

Three factors recur in every status case, in employment law and tax alike.

Personal service and substitution. An employee and a worker both have to do the work personally. A contractor who can send somebody else in their place, and who has done so or realistically could, is much harder to characterise as either. A substitution clause that the client can veto for any reason, or that has never been exercised and everybody knows never would be, carries little weight. A right that is genuinely available and has been used carries a great deal.

Control. Whether the business decides what is done, how, when and where. The Uber factors are a modern statement of the same idea: setting the price, imposing the terms, penalising refusal, managing performance and owning the customer relationship. A contractor who is told which hours to work, reports to a line manager, appears on the rota and is appraised is being controlled in the way an employee is.

Mutuality of obligation. Whether the business is obliged to offer work and the person obliged to accept it. A contractor engaged for one project, free to turn down the next, looks self-employed. A contractor who has been on site every working day for three years, whose work is allocated as it arises and who would be in trouble for declining it, looks like an employee whatever the invoices say.

Other factors add up on top: whether the person provides their own equipment, carries financial risk, has other clients, and how far they are integrated into the business. Our guide to hiring your first employee sets out what follows if the answer is that the person is one.

What the Employment Rights Act 2025 changes

The Employment Rights Act 2025 received royal assent on 18 December 2025 and is being brought into force in stages. It does not change the definitions in section 230 or the tests the courts apply, so the analysis above is unaffected by it. The government has said it will consult separately on a simpler framework for employment status, and nothing has been enacted on that.

Two of the Act's changes bear on how a business uses contractors. From 1 January 2027 the qualifying period for ordinary unfair dismissal falls from two years to six months, so a person who was engaged as a contractor and turns out to be an employee gains the right to claim much sooner than before, and the cost of getting status wrong rises with it. From 1 October 2026 tribunal time limits extend from three months to six. And the Act's guaranteed hours provisions, listed for 2027 without a fixed date, give zero-hours and low-hours workers the right to a contract reflecting the hours they regularly work, with compensation for shifts cancelled at short notice; those apply to workers, so a contractor who is in truth a worker is within them.

Our Employment Rights Act 2025 timeline lists the other changes and the dates they take effect.

What an engaging business should do

List every individual who is paid other than through payroll, including those engaged through their own company or an agency, and for each one write down how the engagement works in practice: who decides the hours, whether they have ever sent a substitute, whether they have other clients, whether they are on the rota and the organisation chart, and how long they have been there.

For each one, answer the employment law question first. If the person is a worker, they are owed holiday pay and the minimum wage now, and the liability accrues whatever the contract says. If the person is an employee, the business has been carrying unfair dismissal and other risks it did not know about.

Then answer the tax question. Work out whether the business is small under the off-payroll rules for this tax year, using the figures in HMRC's guidance, and if it is not, produce a status determination statement for each engagement through an intermediary, with reasons, keeping the working papers. Set up a process for disagreements that meets the 45-day deadline.

Then align the paperwork with the answer. Where somebody is genuinely self-employed, the agreement should describe how that genuinely works. Where somebody is an employee, the honest course is to put them on payroll with a contract of employment, and it is usually cheaper than the alternative arriving later in a tribunal or an HMRC assessment. Our guide to employment law essentials covers what that contract needs to contain.

Frequently asked questions

What is the difference between IR35 and employment status?

They are two separate tests with two separate consequences. Employment status under the Employment Rights Act 1996 decides whether a person is an employee, a worker or self-employed, and so which employment rights they have; a tribunal decides it. The off-payroll rules in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 decide whether a payment to a contractor's company has to be taxed as employment income; HMRC decides that. The factors overlap, and a business has to be right on both.

Does the small company exemption mean I can ignore IR35?

It means the contractor's own company keeps the responsibility for deciding its tax status, and you have no status determination statement to issue. It does not change whether the person is a worker or an employee in employment law, and it does not apply to an individual you engage directly, who is either on your payroll or genuinely self-employed. HMRC's guidance currently tests small against turnover of £10.2 million, a balance sheet total of £5.1 million and 50 employees, meeting two of three.

Have the IR35 small company thresholds changed?

The Companies Act 2006 thresholds in section 382 rose to £15 million turnover and £7.5 million balance sheet total for financial years beginning on or after 6 April 2025, with the employee figure staying at 50. Because the off-payroll test looks back to the last financial year for which accounts were due and needs two consecutive years on the new figures, HMRC's Employment Status Manual says the earliest tax year the new thresholds can affect is 2027/28. Until then the guidance continues to use £10.2 million and £5.1 million.

What has to be in a status determination statement?

The conclusion on whether the worker would have been an employee if engaged directly, and the reasons for it. Section 61NA of the Income Tax (Earnings and Pensions) Act 2003 provides that a statement prepared without reasonable care is not a status determination statement, so a blanket answer applied to every contractor leaves the client carrying the tax liability. The statement goes to the worker and to the party the client contracts with, and the client must answer any disagreement within 45 days.

If the contract says the person is self-employed, is that the end of it?

No. In Uber v Aslam the Supreme Court held that the written terms are not the starting point, because a business could otherwise write its way out of the protections the legislation exists to provide. A tribunal looks at how the arrangement worked: who set the price and the terms, whether the person could refuse work or send a substitute, how performance was managed and who owned the customer relationship. A clause saying nothing creates employment adds nothing where the rest points the other way.

Does the Employment Rights Act 2025 change contractor status?

The Act does not change the definitions in section 230 of the Employment Rights Act 1996 or the tests courts apply. What it changes is the cost of getting status wrong: from 1 January 2027 the unfair dismissal qualifying period falls to six months, and from 1 October 2026 tribunal time limits extend to six months. The guaranteed hours rules for zero-hours and low-hours workers, listed for 2027, apply to workers, which includes a contractor who is in truth a worker.

What is a genuine right of substitution?

A contractual right for the contractor to send somebody else to do the work, which the client cannot veto for any reason it likes, and which the contractor is in practice able to use, paying and briefing the substitute themselves. A clause that has never been used and that everybody understands never would be carries little weight. A right that has been exercised is strong evidence against both employee and worker status, since both require personal service.

Sources & further reading

• Employment Rights Act 1996, section 230: employees, workers etc
• Uber BV and others v Aslam and others [2021] UKSC 5
• Income Tax (Earnings and Pensions) Act 2003, section 60A: when a company qualifies as small
• Income Tax (Earnings and Pensions) Act 2003, section 61NA: status determination statements
• Income Tax (Earnings and Pensions) Act 2003, section 61T: client-led status disagreement process
• Companies Act 2006, section 382: companies qualifying as small
• HMRC Employment Status Manual, ESM10006a: changes to the small company thresholds
• Acas: Employment Rights Act 2025

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 22 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).