IR35 for Foreign Employers (2026): Off-Payroll Rules, Costs and Risk

IR35 is the UK tax rule that treats a contractor working through their own limited company as an employee for income tax and National Insurance when the working relationship looks like employment. HMRC calls the current version the off-payroll working rules, set out in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

The rules do not ban contracting and they do not create employment rights. They decide who pays tax on the fees and how. When an engagement is inside IR35, the party that pays the contractor’s company, called the fee-payer, must deduct income tax and employee National Insurance and pay employer National Insurance, as if the fees were salary.

Since April 2021, private sector clients that are medium or large decide the status of each engagement themselves, as the public sector has done since April 2017. Small private clients still leave that decision to the contractor’s company under the original Chapter 8 rules.

Chapter 10 applies only to a client with a UK connection. HMRC’s Employment Status Manual at ESM10006 says a client has a UK connection if it is UK resident or has a permanent establishment in the UK, tested immediately before the start of the tax year.

A permanent establishment means a fixed place of business such as an office or branch, or an agent who habitually concludes business for the company in the UK. A UK contractor’s own company working for you does not count as your permanent establishment, so engaging UK contractors does not by itself bring you into scope.

If your company has a UK subsidiary, that subsidiary is a UK client in its own right and is assessed on its own size and group position. For how IR35 fits with payroll, contracts and entity choices more widely, see the United Kingdom hiring guide.

A UK-connected private or voluntary sector client decides status unless it is small. Companies use the Companies Act 2006 size test: a company is small if it meets at least two of three conditions, and HMRC’s ESM10006A confirms the higher limits that now apply.

Groups are tested together. If the parent of a group is medium or large, every subsidiary must apply the rules, so a small UK subsidiary of a large overseas group still decides status for its contractors. Clients that are not companies, such as partnerships, use a simpler turnover test instead.

Once you are in scope, you must take reasonable care over each determination, pass a written statement to the worker and to the party you contract with, and run a process for disagreements. A contractor or agency can also ask you to confirm your size; HMRC guidance gives you 45 days to answer, and silence means you are treated as medium or large.

The higher limits apply to financial years beginning on or after 6 April 2025, but no client changes category under them before the 2027/28 tax year. That is HMRC’s published position in ESM10006A, which replaced an earlier alert suggesting April 2026.

The delay comes from how the off-payroll test works. A client’s size for a tax year is based on the last financial year whose accounts filing period ended before that tax year began. For a standard 12-month year, the earliest filing date for a period beginning on or after 6 April 2025 falls in January 2027, which only feeds into the tax year starting 6 April 2027.

Under the Companies Act, a company only changes size category after meeting or failing the conditions for two consecutive financial years. A transitional provision lets the new limits be applied to the year before the first new-rules year, so a company small under both tests for both years leaves the off-payroll rules from 2027/28.

The reverse can also happen. HMRC’s example of a company that was small, grows past the limits in its first new-rules year and is small in the prior year under the transitional rule shows it stays outside the rules until it has been medium-sized for two consecutive years.

If you have no UK connection, IR35 has not gone away: the contractor’s own company must assess status and, if the engagement is inside IR35, calculate a deemed employment payment and pay income tax and both classes of National Insurance on it. You do not issue a statement and you carry none of the PAYE liability.

That shifts the risk, it does not remove it. A contractor who concludes they are inside IR35 will usually ask for a higher rate to cover the extra tax, and a contractor who gets it wrong faces HMRC alone. Many offshore clients still write contracts that support outside status, for example a real right of substitution, because it lowers the chance of disputes later.

Mixed patterns, such as a non-resident who spends part of the year working in the UK, need case-by-case advice because tax residence and the location of the work both affect the result.

Status depends on the whole picture of a hypothetical direct contract between you and the worker, built from the written contract and how the work happens in practice. No single factor decides it. The tests come from case law, not from a statutory definition, and HMRC sets out its view in the Employment Status Manual.

The Supreme Court’s December 2024 judgment in HMRC v Professional Game Match Officials Ltd confirmed that mutuality can exist within each separate engagement and that enough control can exist without a right to direct how the work is done. The practical message for clients: wording in the contract does not override how the engagement runs day to day.

A status determination statement (SDS) is the written outcome of your assessment. HMRC’s off-payroll guidance for clients requires it to state whether the rules apply and the reasons, and it must reach both the worker and the party you contract with. A conclusion without reasons is not a valid statement.

Until you hand over a valid statement, you remain the fee-payer and are liable for the tax and National Insurance, even if an agency sits between you and the contractor. Issue it before the first payment and again whenever the role changes materially.

Workers and deemed employers can disagree with the statement. You must respond within 45 days, either confirming the decision with reasons or issuing a new statement, and you keep applying the original decision while you review it. Miss the deadline and you become liable for the income tax and National Insurance due from then until you respond.

CEST is HMRC’s free online status tool, and HMRC says it will stand by the result as long as the information entered is accurate and matches its guidance. A saved result can serve as the status determination statement if you add your reasons.

The tool asks about control, substitution, financial risk and integration, and HMRC last revised the wording on 30 April 2025. It is anonymous and does not save partial answers, so prepare the contract, the role description and details of how the work actually runs before you start. Keep a dated copy of every result.

If an engagement you called outside IR35 turns out to be inside, the fee-payer owes the income tax and employee National Insurance that should have been deducted, plus employer National Insurance at 15% on payments above £5,000 a year, as set out in HMRC’s rates and thresholds for 2026 to 2027. Employers with a pay bill over £3m also owe the 0.5% Apprenticeship Levy on the deemed payments.

Since 6 April 2024 HMRC must offset tax and National Insurance the worker and their company already paid on the same income against the deemed employer’s bill. That reduces the net liability but does not remove it: employer National Insurance is rarely covered by the offset, and penalties and interest are calculated on the liability before it.

Late payment interest runs from the date each amount was due. HMRC sets it at the Bank of England base rate plus 4%, a margin raised from 2.5% on 6 April 2025, and its published table shows 7.75% from 9 January 2026. On a liability that stretches back several tax years, interest becomes a large part of the bill.

HMRC charges inaccuracy penalties as a percentage of the tax lost, based on behaviour and on whether you told HMRC before it found the error. The ranges below come from HMRC’s compliance factsheet CC/FS7a; there is no penalty where you took reasonable care.

Assessment windows run from the end of the tax year concerned, under HMRC’s compliance handbook. A documented, reasoned statement for every engagement is the evidence of reasonable care that keeps a client in the top row, and it is what HMRC asks to see first in an off-payroll review.

Take a UK software contractor on £550 a day for 220 days, £121,000 a year, engaged by a medium-sized client with a UK office. Outside IR35, the client pays the invoice and nothing more. Inside IR35 with the client as fee-payer and the same rate, employer National Insurance adds 15% on everything above £5,000: £17,400.

The third route is to employ the person through an employer of record on a salary of £100,000, a level chosen so the total lands near the contract fee. The employer adds National Insurance, the minimum 3% auto-enrolment pension on qualifying earnings between £6,240 and £50,270, and the EOR’s service fee.

The EOR fee is an assumption for illustration; UK list prices vary by provider and contract size, and the EOR cost calculator models it for a real salary. The example leaves out the Apprenticeship Levy, holiday pay already built into salary, and any benefits beyond the statutory pension.

The comparison shows why many clients that land on inside IR35 move the person to employment: the client pays roughly the same as an outside contract, the worker gains holiday, sick pay and pension, and the status question disappears.

Since 6 April 2026, the party closest to the worker’s employer in a labour supply chain can be held jointly and severally liable for unpaid PAYE and National Insurance when an umbrella company fails to pay. The rules came in through the Finance Bill 2025 to 2026 as a new chapter of ITEPA, as KPMG’s analysis sets out.

The definition of an umbrella company is wide enough to cover employers of record. Where there is a UK agency, the agency nearest the client usually carries the liability. Where the client contracts directly with the umbrella or EOR, or with an offshore agency or one connected to the umbrella, the client itself can be liable, with no reasonable excuse defence.

How far the joint liability reaches a client with no UK presence and no UK agency in the chain is not settled in published guidance. Treat it as a risk to manage through contract terms and provider choice rather than one to assume away.

The Employment Rights Act 2025, which received Royal Assent on 18 December 2025, does not change IR35 or the tax status tests. It raises the cost of misclassification on the employment law side, because a contractor later found to be an employee or worker can claim rights that are now bigger and arrive sooner.

The new day-one family rights sit alongside the statutory pay rules in our guide to UK maternity and paternity leave. Dates after April 2026 come from the government’s provisional roadmap, summarised by Slaughter and May, and can move.

Separately, the government opened a consultation on employment status in October 2026, closing on 8 January 2027, according to Lewis Silkin. It proposes presuming worker status unless the engager proves otherwise and an online status checker for employment rights. It keeps the separate tax tests, and any change would need new primary legislation.

An employer of record employs the worker directly on a UK employment contract and runs PAYE through real time information, so there is no personal service company and no off-payroll engagement to assess. The worker is an employee for tax and for employment law, and the EOR deducts tax and pays employer National Insurance every month.

For a foreign company with no UK entity, the alternative is registering as an employer with HMRC yourself, setting up auto-enrolment, and handling contracts and statutory pay directly. The EOR route covers those obligations without a UK establishment, which also keeps the UK connection test for the off-payroll rules out of play.

It suits long-term or full-time roles, contractors you want to keep after an inside IR35 decision, and roles where you set the hours and direct the work. Outside contracting through a personal service company remains legitimate for project work with real substitution and financial risk, where the contractor runs a business of their own.

If the person is moving to the UK rather than already living there, sponsorship becomes the issue instead of IR35: see the guide to Skilled Worker visa sponsorship and our wider guide to EOR visas and work permits. Our ranking of the best EOR providers in the United Kingdom compares pricing and contractor conversion support, and the United Kingdom hiring guide covers payroll, notice and the full cost of a UK hire.

Short answers to what employers outside the UK ask most about IR35, checked against HMRC guidance and the Employment Status Manual on 24 October 2026.