Off-Payroll Working rules (Chapter 10): a simple guide

The Off-Payroll Working rules changed who is responsible for deciding whether IR35 applies.

Under the original IR35 legislation, the contractor’s limited company makes the decision and is responsible for any tax due.

Under the Off-Payroll rules, that responsibility usually moves to the client. The client decides the contractor’s status and the organisation paying the contractor’s company must operate PAYE where the engagement is inside IR35.

Our IR35 Responsibility Checker works through these responsibility rules and identifies who should make the decision and who may have to operate PAYE and National Insurance.

The rules are contained in Chapter 10 of ITEPA 2003. The original IR35 rules remain in Chapter 8.

Although the responsibilities are different, both chapters use the same employment status tests.

For a wider explanation of IR35, read our main IR35 guide.

When do the Off-Payroll rules apply?

Chapter 10 applies to:

public authorities
medium and large private-sector clients
medium and large voluntary-sector clients

The public-sector rules took effect in April 2017. They were extended to medium and large organisations outside the public sector in April 2021.

A qualifying small client outside the public sector does not have to operate Chapter 10. The contractor’s intermediary, usually their personal service company, remains responsible under Chapter 8.

There are separate rules for some overseas and non-corporate clients.

Which company-size thresholds apply?

For the 2026/27 tax year, a corporate client will generally be medium or large if it meets at least two of the following conditions for the relevant financial years:

turnover of more than £10.2 million
a balance sheet total of more than £5.1 million
an average of more than 50 employees

The Companies Act thresholds increased to £15 million turnover and a £7.5 million balance sheet total for financial years beginning on or after 6 April 2025.

However, this did not immediately change a client’s size for Off-Payroll purposes. HMRC says that, in most cases, the new thresholds will not have a practical effect until the 2027/28 tax year.

The timing depends on the client’s accounting periods, filing dates and whether it meets the conditions over consecutive financial years.

Read our full guide to the small company exemption and the threshold changes.

What does the client have to do?

Where Chapter 10 applies, the client must:

decide whether the contractor would have been an employee for tax purposes if engaged directly
take reasonable care when reaching that decision
prepare a Status Determination Statement (SDS)
give the SDS to the worker and the person or organisation it contracts with
deal with any representations made under the status disagreement process

The SDS must state whether the engagement is inside or outside IR35 and explain the reasons for the decision.

Simply stating “inside IR35” or attaching a CEST result without any explanation is not enough.

What happens to the SDS?

The client must give the SDS directly to the worker.

If an agency or another organisation sits between the client and the contractor’s company, the client must also give the SDS to the party it contracts with.

Each qualifying party in a longer contractual chain must pass the SDS to the next party until it reaches the organisation responsible for paying the contractor’s intermediary.

If a party receives the SDS but fails to pass it on, the PAYE liability can remain with that party.

Who operates PAYE?

The organisation which pays the contractor’s intermediary is normally known as the fee-payer or deemed employer.

Where the SDS says the engagement is inside IR35, the deemed employer must:

deduct PAYE income tax
deduct employee National Insurance contributions
pay employer National Insurance contributions
pay the Apprenticeship Levy where applicable

The contractor’s company receives the net payment after the relevant deductions.

The fee-payer is often a recruitment agency. If the client engages the contractor’s company directly, the client will usually be the deemed employer as well.

What happens if the status decision is wrong?

The client does not automatically become liable simply because HMRC later disagrees with its status decision.

If the client took reasonable care, issued a valid SDS and sent it to the required parties, it will normally have met its Chapter 10 obligations. Any PAYE liability will generally sit with the deemed employer.

The position is different if the client:

did not issue an SDS
failed to give reasons for its decision
did not take reasonable care
failed to send the SDS to the worker or the party it contracts with
did not complete the disagreement process within 45 days

In these circumstances, the tax and National Insurance liability may rest with the client.

Other parties in the chain can also become liable if they receive an SDS but fail to pass it on.

Several public bodies have received large Off-Payroll tax bills after failing to apply the rules correctly.

How is IR35 status decided?

Chapter 10 uses the same underlying employment status principles as Chapter 8.

The main factors include:

The written contracts are central to the assessment. The client should also obtain accurate information about the circumstances of the engagement before reaching its decision.

A contractual term cannot simply be ignored because it has never been exercised. Equally, the client should not rely on a standard contract without checking that it records the agreement made with the contractor.

Our IR35 status tests guide explains how these factors are applied.

Can clients use CEST?

Many organisations use HMRC’s Check Employment Status for Tax tool.

CEST can form part of a reasonable status process, but using it does not automatically prove that the client took reasonable care.

The answers must be accurate, the person completing the assessment must understand the engagement and the result should be reviewed where it does not appear to fit the facts.

CEST also returns an undetermined result in some cases.

Read our guide to how CEST works and its limitations.

Can a contractor challenge an SDS?

The worker or the deemed employer can make representations to the client if they disagree with the SDS.

The client must respond within 45 days. It must either:

confirm its original decision and give reasons; or
change the decision and issue a new SDS.

There is no independent statutory appeal as part of this process. The client makes the final decision.

If you have received a determination you believe is wrong, read our guide to challenging an IR35 status determination.

What the rules mean for contractors

The first question is whether the client is a public authority, medium or large organisation, or a qualifying small client.

If Chapter 10 applies, the client decides the status of the engagement.

If the small-client exclusion applies, the contractor’s company remains responsible for considering IR35 under Chapter 8.

Some larger organisations no longer engage personal service companies and require all contractors to work through umbrella companies. Others assess each engagement and continue to offer outside IR35 contracts where the terms support that decision.

A contractor employed by an umbrella company is already paid through PAYE. The IR35 status rules do not apply to that umbrella employment, even though the role may be advertised as “inside IR35”.

Read our guide to the difference between inside IR35 and umbrella company engagements.

Where to get help

HMRC’s guidance is available here: Understanding Off-Payroll Working.

For more detail on the original rules, read our IR35 basics guide.

Clients that engage contractors regularly may also benefit from an IR35 audit to check their status process, contractual chain and record-keeping.