IR35 refers to the off-payroll working rules contained in Chapter 8 and Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The rules apply where a worker provides services to a client through a personal service company (PSC) or other intermediary, and the working arrangement is sufficiently similar to direct employment that HMRC would treat the worker as a deemed employee. The key tests used to assess status are control, substitution, and mutuality of obligation, drawn from case law rather than statute.
Since April 2021, responsibility for determining IR35 status shifted to the end client for medium and large private-sector engagers. The client must issue a Status Determination Statement (SDS), and if the engagement falls inside IR35, the fee-payer in the chain (typically the agency) must deduct PAYE income tax and employee National Insurance Contributions before paying the worker's intermediary. The worker's company does not receive a gross payment and cannot use the dividend-salary mix that made PSC contracting tax-efficient outside IR35.
Small companies remain exempt from the 2021 rules; in those cases the PSC itself retains responsibility for self-assessing status under Chapter 8. HMRC's Check Employment Status for Tax (CEST) tool provides indicative guidance but is not legally binding, and engagers should retain documented evidence of their determination process to defend against a challenge.