In 2027, medium and large private-sector clients in the UK still decide whether their contractors fall inside IR35. What changes is who counts as small. Higher company size thresholds, introduced for financial years starting on or after April 6, 2025, take practical effect for most businesses from April 6, 2027. More mid-sized companies will move outside the off-payroll working rules. For clients that remain in scope, getting a contractor's status wrong can shift unpaid tax and National Insurance onto the business.
| Key Takeaways | |
|---|---|
| Medium and large clients still make the IR35 decision | Under the off-payroll working rules, a medium or large private-sector client must assess each contractor's status and issue a Status Determination Statement (SDS). Small clients leave the decision to the contractor's own company. (GOV.UK) |
| More companies qualify as small from April 2027 | A company is small if it meets two of three tests: turnover up to £15 million, balance sheet up to £7.5 million, and up to 50 employees. Because size is tested on prior financial years, most companies see the change from April 6, 2027 at the earliest. (ICAEW) |
| Inside-IR35 roles need a compliant route | When a role falls inside IR35, the fee-payer must deduct income tax and National Insurance. Hiring through an Employer of Record is often the simplest compliant alternative. |
In This Guide
The UK has a large market of skilled contractors, many working through their own personal service companies (PSCs). For companies that need specialist skills quickly, contractors offer flexibility. IR35 exists to make sure that people who work like employees pay tax like employees.
Since April 2021, medium and large private-sector clients have carried responsibility for deciding status. This guide explains how the rules work in 2027, what the threshold changes mean, and how to hire UK contractors with confidence. It is general information, not tax advice.
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IR35, formally the intermediaries legislation, applies when a worker provides services through an intermediary, usually their own limited company, but would be an employee if engaged directly.
| Client type | Who decides status | Who deducts tax if inside IR35 |
|---|---|---|
| Public sector body | The client | The fee-payer (the party that pays the contractor's company) |
| Medium or large private-sector client | The client, via an SDS | The fee-payer |
| Small private-sector client, or a client wholly overseas | The contractor's own company | The contractor's own company |
The Companies Act size thresholds increased for financial years beginning on or after April 6, 2025, and HMRC confirmed they also apply to the off-payroll working rules. A private company is small if it meets at least two of these conditions:
| Test | Previous threshold | New threshold |
|---|---|---|
| Annual turnover | Up to £10.2 million | Up to £15 million |
| Balance sheet total | Up to £5.1 million | Up to £7.5 million |
| Average employees | Up to 50 | Up to 50 (unchanged) |
A company's size for IR35 depends on its results in previous financial years, so the change does not apply immediately. ICAEW and HMRC guidance indicate most companies will feel the effect from April 6, 2027 at the earliest.
Worked example
A UK software company has a March year-end, £13 million turnover, a £6 million balance sheet, and 80 employees. Under the old thresholds it was medium-sized and had to issue SDSs. If it meets the new turnover and balance sheet tests for the relevant financial years, it can be treated as small from April 6, 2027. Its contractors' own companies would then decide their IR35 status. Confirm timing with your accountant.
Related change: since April 6, 2026, recruitment agencies have been jointly and severally liable for PAYE and National Insurance that an umbrella company fails to pay on workers it supplies. Where no agency is involved, that liability falls on the end client. Check your umbrella company arrangements if you use them for contractors inside IR35.
There is no single test. HMRC and the courts look at the whole working relationship, and especially at three factors:
Other factors include financial risk, use of the contractor's own equipment, integration into the client's team, and whether the contractor works for other clients.
Clients can use HMRC's Check Employment Status for Tax (CEST) tool to support their decision. They must take reasonable care, explain their reasons in the SDS, and have a process for contractors to disagree with the decision.
Unsure whether your UK contractors fall inside IR35?
Slasify can review your engagements and recommend a compliant route.
When a client in scope gets status wrong or fails to take reasonable care, the tax liability can move to the client. The consequences include:
Blanket decisions are a red flag
Placing every contractor inside IR35 to avoid risk can fail the reasonable-care test and push skilled contractors toward competitors. Assess each role on its own facts.
Foreign companies that engage UK contractors often ask whether IR35 applies to them. HMRC's guidance is clear: if your organization is based wholly overseas, meaning it is not UK resident and has no UK permanent establishment, the off-payroll working rules do not apply. The contractor's own company is then responsible for deciding whether IR35 applies.
That does not remove all risk. If the client has or later sets up a UK branch or office, the rules apply in full. Engaging contractors through a UK agency can also bring the rules into play. Overseas companies should consider UK employment rights and permanent establishment risk too when a contractor works like a full-time employee.
| Option | When it fits | What to consider |
|---|---|---|
| Hire through an Employer of Record | You want the person long term but have no UK entity | Fast setup; full UK employment rights and payroll handled for you |
| Employ directly through your own UK entity | You already run UK payroll | You manage contracts, PAYE, pensions, and HR |
| Use a compliant umbrella company or agency | Short-term or project-based roles | Since April 2026, the agency (or you, if there is no agency) is liable for PAYE the umbrella fails to pay |
| Restructure the engagement | The role can genuinely run as an outsourced service | Changes must reflect real working practices, not just contract wording |
Slasify's Employer of Record service lets you employ UK talent compliantly without a local entity.
The 2027 threshold changes will reduce the IR35 workload for many mid-sized companies, but they do not change the underlying test. Clients that remain in scope still need careful, documented status decisions, and every company should check how its contractors actually work.
Need a compliant way to hire inside-IR35 workers?
Book a free consultation with Slasify's UK team today.
No. If a private-sector client qualifies as small, the contractor's own limited company decides IR35 status. From April 2027, more companies qualify as small because the turnover and balance sheet thresholds rose to £15 million and £7.5 million, with the 50-employee test unchanged.
A Status Determination Statement is the written decision a medium or large client gives a contractor about whether IR35 applies. It must explain the reasons for the decision. The client must pass it to the contractor and the next party in the supply chain, and must handle any disagreement through a formal process.
It helps. HMRC has said it will stand by CEST results when the information entered is accurate and the tool is used as intended. CEST does not cover every situation, however, so companies should keep records of how they assessed each role and review decisions when working arrangements change.
No, not to your company. HMRC guidance says the off-payroll working rules do not apply to a client based wholly overseas, with no UK residence or permanent establishment. The contractor's own company decides IR35 status instead. If you open a UK branch or office, the rules apply to you in full.
You have several options. You can deduct tax and National Insurance through the fee-payer, employ the person directly, or hire them through an Employer of Record. An EOR is often the simplest route for companies without a UK entity, because it handles UK contracts, payroll, and benefits.
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