Quick Answer
If you trade as a sole trader, IR35 does not apply to you. If you work through your own limited company (a personal service company, or PSC), it might. From 6 April 2026 the small company thresholds shift: turnover up to £15 million and balance sheet up to £7.5 million. About 14,000 clients will fall back into the small bracket, which means responsibility for assessing your IR35 status flips from the client to you. Run your contracts through HMRC's CEST tool, check substitution, control and mutuality of obligation, and keep records. If you sit inside IR35, your take-home pay drops roughly 20 to 30 per cent, so this is worth getting right.
Table of Contents
- What IR35 actually is (and what it is not)
- How IR35 applies to UK trades and construction
- What changes on 6 April 2026
- The three core tests: substitution, control and MOO
- IR35 versus CIS: which one applies
- How to check your status with CEST
- What to do if you are caught inside IR35
- Using AI to stay compliant without the faff
- Timeline of IR35 changes that matter
- What contractors are saying
- Recommended videos
- Frequently asked questions
- My verdict
What IR35 actually is (and what it is not)
IR35 is shorthand for the off-payroll working rules. The legislation has been around since the year 2000, but the version most of us deal with came in for the private sector in April 2021. It exists for one reason: to stop people leaving a PAYE job on a Friday, setting up a limited company, and coming back on Monday to do the same job for the same boss while paying themselves in dividends.
That is the short version. The longer version is messier, and the messier version is the one that catches genuine tradespeople by surprise.
Here is what IR35 is not. It is not a tax on self-employment. It is not aimed at the bloke who picks his own jobs, supplies his own tools, prices his own work and carries his own van. It is not relevant if you trade as a sole trader. Sole traders are clearly self-employed, and HMRC already has CIS to police construction payments at source.
IR35 only bites when you put a limited company between yourself and the client. At that point, HMRC looks through the company at the working relationship and asks one question: if the limited company was not there, would this person look like an employee of the client? If the answer is yes, the engagement is inside IR35 and the tax bill matches a PAYE employee. If the answer is no, you stay outside, and you keep the flexibility your company structure gives you.
How IR35 applies to UK trades and construction
Most jobbing tradespeople reading this are sole traders. If that is you, you can take a breath. IR35 is not your problem. CIS still is, and Making Tax Digital still is, but the off-payroll rules do not apply to your van and toolbox.
The picture changes the moment you incorporate. A surprising number of plumbers, electricians, gas engineers, builders, joiners and renewables installers now run through limited companies. They do it for tax efficiency, for liability protection, or because a larger client said "we only deal with limited companies." Every one of those companies is, technically, a personal service company. Every one of them needs to think about IR35.
The classic trades scenario that gets flagged is this. You leave a salaried job at a national contractor. You set up a Ltd. The same contractor takes you back, on the same site, doing the same work, supplied with the same tools, told when to start and when to leave. You invoice through your company at a higher day rate. From the outside, it looks identical to employment with a tax wrapper on top. That is exactly what HMRC wrote IR35 to catch.
The opposite scenario, which is the one most tradespeople actually live in, is also clear. You pick which jobs to take. You quote, you price, you carry the risk if it overruns. You bring your own tools and your own van. You work for four or five clients in a year, not one. You can send a competent mate to finish a job if you have a clash. That picture is outside IR35, and the rules should not change anything for you.
What changes on 6 April 2026
The headline change in 2026 is not a new test or a new rate. It is a threshold change, and it shifts who has to do the paperwork.
From 6 April 2026, two of the three statutory size thresholds that define a "small" company go up. Turnover lifts from £10.2 million to £15 million. Balance sheet total lifts from £5.1 million to £7.5 million. The employee headcount stays at 50.
That sounds dry until you realise what it does. HMRC's own figures say around 14,000 client companies will move from medium-sized down to small. Once a client is classed as small, the off-payroll rules no longer make them responsible for assessing the IR35 status of contractors they engage. The responsibility flips back to the contractor's own limited company.
That is a double-edged sword. On one hand, you regain control. You decide whether your engagement is inside or outside. You write the determination. You keep the evidence. On the other hand, you carry the risk if HMRC disagrees. Get it wrong and the tax, the interest and the penalties land on your company, not the client's.
One important wrinkle. IR35 size tests work off the previous financial year's accounts. That means the new thresholds will apply in practice from April 2027 in most cases. But contractors working with clients that already meet the smaller new definition can expect their April 2026 reviews to land differently from their April 2025 ones.
The three core tests: substitution, control and MOO
If you remember nothing else from this guide, remember these three words. Every IR35 case turns on them. Tax tribunals have been built on them. HMRC's CEST tool is built around them. Every contract review you ever pay for will come back to them.
1. Right of substitution
If you can send someone competent to finish your job, and the client cannot refuse, you look like a business. If the client insists it has to be you personally, every day, you look like an employee. Genuine substitution rights are the single strongest indicator of being outside IR35.
This needs to be real. A clause in the contract that says you can substitute, where everyone knows in practice the client would refuse, will not save you. Tribunals look at what actually happens on the ground, not just what the paper says.
2. Control
Control is about who decides how, when and where the work gets done. If you decide your own working method, set your own hours within the job timescale, and choose your own kit, you point outside IR35. If the client tells you to clock in at 7.30, take lunch at 12, finish at 5 and use their equipment, you look like an employee.
In construction, this gets blurred. Site rules, PPE requirements, scheduled handovers and toolbox talks all involve some control. That is fine. What HMRC is looking for is control over how you do the work, not just where the work has to happen.
3. Mutuality of obligation
This is the messy one. Mutuality of obligation, or MOO, asks whether the client has to give you more work and whether you have to accept it. Employees have continuous mutual obligations. Contractors do not. If your engagement is one job, one quote, one invoice and then off, MOO points outside. If your client keeps you on the books indefinitely, calls you when they have work, and assumes you will accept, MOO points inside.
IR35 versus CIS: which one applies
This is where construction is different from every other sector. We have two parallel tax regimes that can sit on top of the same engagement. CIS deductions at 20 per cent for verified subcontractors, or 30 per cent if unverified, run alongside the IR35 question of employment status. They are not alternatives. They can both apply at the same time.
The simple way to remember it. CIS governs the deduction made from a payment. IR35 governs whether the engagement is employment-like for tax purposes. CIS is about cash flow at source. IR35 is about how the whole payment should have been taxed if you stripped the company away.
HMRC has made it clear that IR35 takes precedence. If your limited company is engaged on a project and the engagement is inside IR35, the fee-payer pays you under PAYE and CIS does not apply to those payments. If the engagement is outside IR35 and the client is a CIS contractor, CIS applies as normal.
| Engagement type | IR35 applies? | CIS applies? |
|---|---|---|
| Sole trader subcontractor | No | Yes (20% or 30%) |
| Ltd company outside IR35, CIS contractor pays | No (outside) | Yes (20% or 30% on labour) |
| Ltd company inside IR35, deemed employment | Yes (inside) | No (PAYE used instead) |
| Ltd company with gross payment status | Depends on engagement | Yes, deducted at 0% |
The takeaway for trades running through a limited company is this. CIS deductions arriving in your bank do not mean IR35 has been handled. They are two separate regimes. The contractor down the chain still needs to think about employment status, and from April 2026 more of those contractors will need to think about it themselves rather than relying on the principal to do it for them.
How to check your status with CEST
HMRC's free tool for working out IR35 status is called CEST, short for Check Employment Status for Tax. It lives on gov.uk and asks a series of questions about how the engagement actually works. At the end it gives you one of three outcomes: outside the rules, inside the rules, or "unable to determine."
CEST is useful for three reasons. It is free. It is HMRC's own tool, so a clean outside-IR35 result gives you a measure of protection if HMRC later challenges. And it forces you to think about the engagement in concrete terms rather than vague impressions.
It is not perfect. Critics have hammered it for years on the way it handles mutuality of obligation, which used to barely register in the questionnaire. The May 2025 update added a gateway question on MOO and changed several other answers, so anything you ran before then needs running again. Around 15 per cent of cases still come back undetermined, which is no use to anyone.
The practical workflow looks like this. Save the CEST printout. Save the contract. Save your invoices. Save any email exchanges that show you exercising control over how the work gets done, or evidence of substitution being offered. Run CEST again whenever the working arrangement changes materially. Once a year for ongoing engagements is a sensible minimum.
What to do if you are caught inside IR35
If a contract is inside IR35, the situation is not the end of the world. It just means the tax bill changes. The decision then is whether the engagement is still worth taking.
Three practical options. First, you can accept the deemed-employment treatment. The fee-payer runs the payment through PAYE. Your headline rate looks the same but the net is lower. You may negotiate a higher day rate to offset some of the take-home hit. This is the cleanest route for short engagements.
Second, you can change how the work is structured. Genuine right of substitution. No fixed daily hours unless the project genuinely requires them. Your tools, your van, your insurance. Multiple clients across the year. None of these are tricks. They are the marks of a real business. If your day-to-day reality matches, the engagement may move outside IR35 on a fresh review.
Third, you can move under an umbrella for that engagement. The umbrella employs you for the duration. It deducts PAYE, pays employer NICs and gives you a payslip. It costs you a weekly fee but it is simple and HMRC compliant. If the engagement is a one-off and the client will not budge on the structure, this is often the path of least resistance.
Using AI to stay compliant without the faff
One of the genuinely useful things modern AI tools can do for a small trades limited company is take the drag out of IR35 record-keeping. Not by replacing your accountant. They still matter. But by handling the boring middle that everyone hates and most contractors skip.
Three workflows are worth setting up.
Contract triage. Drop a new client contract into a tool like ChatGPT or Claude with a prompt asking it to highlight substitution, control and MOO clauses, flag anything that looks weak, and suggest plain-English questions to put back to the client before signing. This takes ninety seconds and catches things buried in legal boilerplate.
Status determination evidence. Use the same tools to take a CEST printout and a contract, and generate a short summary of the working arrangement in plain English. Save it with the contract. If HMRC ever asks how you reached your conclusion, you have a written record from the time the decision was made.
Quarterly review. Set a recurring reminder. Once a quarter, list your live engagements. Run each one through the same prompt. Has anything changed in the working pattern? Have you done more work for one client than the others? Has the substitution right been exercised, refused or never tested? Five minutes of thinking now beats a five-figure tax bill later.
None of this is fancy. It is the same discipline a competent accountant would impose on you, made cheap by AI. The point is to make the right behaviour the easy behaviour.
Timeline of IR35 changes that matter
| Date | Change | Why it matters for trades |
|---|---|---|
| April 2000 | Original IR35 introduced | Concept of disguised employment born |
| April 2017 | Public sector off-payroll rules | Responsibility for status moved to public-sector clients |
| April 2021 | Private sector off-payroll rules | Medium and large private clients became responsible, including most national contractors |
| May 2025 | CEST tool updated | New MOO gateway question changed many borderline answers |
| April 2025 | Initial threshold change announced | Companies Act small-company thresholds raised |
| 6 April 2026 | IR35 small thresholds align | About 14,000 client companies move from medium to small; responsibility flips back to contractors |
| April 2026 | CIS mandatory monthly returns | All mainstream construction contractors must file monthly CIS returns, nil or otherwise |
| From April 2027 | Practical effect of 2026 thresholds | Status tests reference prior accounts, so most reclassifications bite a year later |
The pattern in that timeline is worth noticing. Every change in the last decade has been about who carries the risk of getting status wrong, not about the underlying tests. The tests have barely moved. Substitution, control, MOO. That is still the game.
What contractors are saying
Recommended videos
HMRC CEST Tool Explained: IR35 Status Risks
MTA
HMRC IR35 Checker: How to Check Your Status
Tax Education UK
The worst question on CEST
Qdos Contractor
HMRC's CEST Tool Fails 400,000+ Times
Qdos Contractor
IR35: How to arrive at a Status Determination
Status determination practical walkthrough
Updates to CEST's Status Determination
HMRC compliance check tool walkthrough
IR35 rules for new contractors
For first-time limited company directors
What is CEST?
Kingsbridge Insurance
Frequently asked questions
No. IR35 only applies when you provide services through a limited company or other intermediary. Sole traders are self-employed in their own right. You still have to deal with CIS if you work in construction, and Making Tax Digital from April 2026 if your turnover meets the threshold, but the off-payroll rules are not your problem.
Run the engagement through HMRC's CEST tool at gov.uk. Answer honestly. Save the result. Then check the answer against the three core tests: do you have a genuine right of substitution, do you control how the work is done, and is there an ongoing obligation on both sides to provide and accept work. CEST will give you a starting point. A specialist contractor accountant or a contract reviewer like Qdos or IR35 Shield can confirm it.
From the start of the relevant tax year, responsibility for assessing your IR35 status moves from the client back to your own limited company. You make the determination, you keep the evidence, and you carry the liability if HMRC later disagrees. Document everything. Run CEST. Get a contract review. Make sure the working arrangement and the paperwork match.
Not at the same time on the same payment. If an engagement is inside IR35, the fee-payer runs the payment through PAYE and CIS does not apply. If the engagement is outside IR35, CIS applies as normal on labour payments at 20 per cent or 30 per cent. The two schemes coexist in the same sector but only one set of deductions hits a given payment.
Roughly 20 to 30 per cent of your take-home, compared with an outside-IR35 engagement at the same headline rate. The fee-payer deducts income tax and employee National Insurance, then has to cover employer NICs and the Apprenticeship Levy before the net comes to your company. The exact figure depends on your rate, your other earnings and your expenses, but planning around a 25 per cent haircut is realistic.
It is a political talking point, and Reform UK has publicly said it would scrap both IR35 and the off-payroll rules. The Conservatives have also flagged reform. Treat all of that as background noise until something concrete passes. Plan and document your engagements on the basis that the current rules still apply, because they do.
For a short engagement that the client insists must be inside IR35, an umbrella is often the simplest route. You become an employee of the umbrella, the umbrella handles PAYE, and you get a payslip. For ongoing self-employed work where the engagements are genuinely outside IR35, an umbrella adds a weekly fee for no tax benefit. The right answer depends on your actual mix of work.
My verdict
If you are a sole trader, get on with your day. IR35 is not for you. If you run a limited company, treat the April 2026 threshold change as the prompt to get your records in order. Run CEST on every live engagement. Save the printout. Make sure your working pattern matches the paperwork, because the tribunals look at reality, not contracts. Use AI to take the boring middle out of compliance, and use a specialist accountant for the parts that need a human. None of this is glamorous, but staying outside IR35 is worth several thousand pounds a year per engagement. That is real money in your business, and the time you spend on it pays for itself many times over.
Three articles worth reading next: the 90-day rolling cash flow forecast for trades covers the operational side of running a Ltd company well; the Building Safety Levy guide explains another new tax cost hitting construction in 2026; and the Building Safety Act financial impact guide walks through the wider compliance budget every contractor should plan for.
