Guide · Helen Forsyth, Fractional CCO
IR35 and
Fractional Executives
The off-payroll working rules are the first thing a finance director asks about and the last thing most fractional websites explain. Here is how they work, who carries the risk, and what changes from April 2026.
The short answer
I work outside IR35. I am responsible for my own tax, National Insurance and pension, so a client carries none of the employment overhead of a senior hire: no employer NI, no pension contribution, no holiday or sick pay and no benefits.
Whether an engagement sits inside or outside the rules is determined per engagement, on how the working relationship operates in practice. The job title, the invoice and the wording of the contract do not settle it.
Who makes that determination depends on the size of the client. If your company qualifies as small, the contractor’s own limited company determines its status and carries the liability. If your company is medium or large, you determine it and issue a Status Determination Statement.
This page is general information about how the rules are structured, written by a commercial adviser rather than a tax adviser. It is not tax advice and it is not a substitute for it. Status depends on the facts of each engagement, and you should take professional advice on your own position.
Part 01
What IR35 is
IR35 (formally the off-payroll working rules) asks whether an engagement would look like employment if you removed the limited company sitting between the worker and the client.
If the answer is yes, the engagement is “inside IR35” and income tax and National Insurance apply as though it were employment. If no, it is “outside IR35” and the contractor’s company is taxed as a business.
Two things it is not:
- It is not a tax on consultancy. Business-to-business services provided by someone running an independent business are outside the rules by design.
- It is not settled by the contract. A well-drafted contract helps, but HMRC looks at how the relationship works in practice. A contract saying there is a right of substitution means nothing if substitution would never in fact be accepted.
IR35 does not apply to sole traders, whose employment status for tax is assessed under different rules. It applies where services are supplied through an intermediary, most commonly a personal service company.
Part 02
Who decides, and how company size changes the answer
This is the part that catches finance teams out, because the answer reversed for the private sector in April 2021 and then only for some companies.
| Client size | Who determines status | Who carries the liability | Rules |
|---|---|---|---|
| Small | The contractor’s own limited company | The contractor’s company | Chapter 8, ITEPA 2003 |
| Medium or large | The client (end user of the services) | The fee-payer, usually the client | Chapter 10, ITEPA 2003 |
| Any public sector body | The client | The fee-payer | Chapter 10, ITEPA 2003 |
If you are a small company, you have nothing to do beyond contracting sensibly, because the determination and the risk sit with the contractor. Most startups and a great many established SMEs fall here.
If you are medium or large, you must take reasonable care to determine status, issue a Status Determination Statement to the contractor, and operate a disagreement process. Blanket determinations applied across all contractors without considering the individual engagement are specifically not reasonable care.
Clients often miss one point in their favour. Since April 2024, where an engagement is later found to have been wrongly determined as outside IR35, HMRC can offset tax and NIC already paid by the contractor and their company against the client’s liability. It does not remove the risk, but it removes the double-counting that made the original exposure look catastrophic.
Part 03
The small company exemption, and what changes in April 2026
“Small” uses the Companies Act 2006 definition, and you qualify by meeting at least two of three conditions. Those thresholds rise for financial years beginning on or after 6 April 2026.
| Condition | Current | From 6 April 2026 |
|---|---|---|
| Annual turnover | Not more than £10.2M | Not more than £15M |
| Balance sheet total | Not more than £5.1M | Not more than £7.5M |
| Average employees | Not more than 50 | Not more than 50 |
| How many must be met | Any two of the three | Any two of the three |
The effect is that a further tranche of mid-sized companies (around 14,000, on the government’s own figure) move back out of scope and no longer have to determine status for their contractors.
Be careful with the date. Company size is assessed against completed financial years, and there are separate two-year consistency conditions for companies moving between categories. Commentators disagree about when the change bites in practice, and several put the effect at April 2027 or later depending on your year end. Confirm your own position with your accountant rather than assuming the headline date applies to you.
There are two further wrinkles. The test applies differently to groups, where the parent’s aggregated figures can count, and unincorporated clients are assessed on turnover alone.
Part 04
What puts a fractional engagement outside IR35
Status turns on the substance of the relationship. The three classic tests come from case law, and the business-on-own-account factors sit alongside them.
Control
Does the client direct how the work is done, or contract for an outcome? A fractional CCO brought in to design and prove a commercial model decides the method. Being told which hours to be at a desk, and how to do the job, points the other way.
Substitution
Could the work be delivered by someone else the contractor provides? This is weaker for fractional executive roles, where you are often engaged for your specific experience, so it should not be the test you lean on.
Mutuality of obligation
Is the client obliged to provide continuous work, and the contractor obliged to accept it? A defined plan with agreed outcomes, such as a 90-day plan, is a project. An open-ended obligation to turn up and do whatever is needed looks like a job.
Business on own account
Multiple concurrent clients, own equipment, own insurance, own marketing, financial risk on delivery, no entitlement to employee benefits, no line management responsibility, not in the org chart. Each is a weak indicator on its own; together they carry weight.
Where fractional engagements get into trouble is usually drift: an arrangement that starts as a defined commercial project and slowly becomes a part-time job with a team reporting into it, a laptop, an internal email signature and a seat at the management meeting. The contract stays the same while the working reality moves away from it.
HMRC’s CEST tool is the free first check, and using it with accurate inputs gives a client some protection. It is not the last word, because it returns an undetermined outcome in a meaningful share of cases and does not weigh mutuality of obligation the way the tribunals do.
Part 05
What a client should have in place
Whatever your size, the practical steps are these:
- Establish your size first. If you are small, the determination is not yours to make. Confirm it, record the basis, and move on.
- Contract for outcomes, not time. A statement of work with deliverables and agreed outcomes is stronger evidence than a contract for a number of days.
- Keep the working practices consistent with the contract. This counts for more than the drafting. If the paperwork says one thing and the day-to-day says another, the day-to-day wins.
- Do not put a fractional executive in the org chart. No line management, no performance review cycle, no employee benefits, no internal HR processes.
- If you are medium or large, determine per engagement and issue the SDS. Keep the reasoning on file and run a disagreement process contractors can use. Blanket policies are the thing HMRC looks for.
- Review at renewal. Re-check when scope, duration or working practices change materially. Drift is the most common cause of a determination becoming wrong over time.
Part 06
How I work
For the avoidance of a long contract-stage conversation, this is the shape of my engagements:
- Services supplied through my own limited company, working outside IR35
- Multiple concurrent clients at any time, which is inherent to the fractional model
- An agreed plan with measurable outcomes (for example over 90 days) rather than a commitment to hours
- Monthly retainer from £1,800 (the minimum), scaled to the business need and the time the work requires
- My own equipment, my own tax, National Insurance and pension
- No line management of your staff, no place in your org chart, no employee benefits
- Predominantly remote, with on-site time where it helps the work, particularly early in an engagement
If your finance or legal team needs specific wording, evidence of insurance, or a determination discussion, raise it on the intro call. It is a five-minute conversation upfront and a tedious one at contract stage.
To repeat, this is general information, not tax advice. IR35 status is determined on the facts of each individual engagement, the rules change, and the dates on which changes take effect depend on your own financial year. Take advice from a qualified tax professional on your position.
Questions
Common questions
Do you work inside or outside IR35?
Outside. I supply services through my own limited company, work with several clients concurrently, use my own equipment, and am responsible for my own tax, National Insurance and pension. Engagements are contracted around an agreed plan with outcomes (a 90-day plan is one example) rather than a commitment to hours.
Does my company have to determine IR35 status?
Only if it does not qualify as small. Small companies are exempt, and the contractor’s own limited company determines status and carries the liability. Medium and large private sector companies, and all public sector bodies, must determine status themselves and issue a Status Determination Statement.
What counts as a small company for IR35?
It uses the Companies Act 2006 definition. You must meet at least two of three conditions: turnover not more than £10.2M, balance sheet total not more than £5.1M, and not more than 50 employees on average. For financial years beginning on or after 6 April 2026 the first two rise to £15M and £7.5M, with the employee count unchanged.
When do the new IR35 thresholds take effect?
The stated date is for financial years beginning on or after 6 April 2026, but company size is assessed against completed financial years and there are two-year consistency conditions. That means the practical effect for many companies lands later, and several commentators say April 2027 or beyond, depending on year end. Confirm with your accountant rather than relying on the headline date.
Does a contract saying "outside IR35" settle the question?
No. HMRC assesses how the engagement operates in practice, whatever the paperwork asserts. A well-drafted contract helps, but if the working practices look like employment (direction over how the work is done, an open-ended obligation to provide and accept work, a place in the org chart), the working practices are what count.
Is a fractional CCO automatically outside IR35 because they have several clients?
No. Multiple concurrent clients is a strong business-on-own-account indicator, but status is determined per engagement. One relationship in a portfolio can sit inside the rules while the others sit outside, particularly if that one has drifted into something resembling a part-time job.
Can we use HMRC’s CEST tool?
Yes, and it is a sensible first check. HMRC will stand behind a CEST outcome where the inputs were accurate and the working practices match. But it returns an undetermined result in a significant share of cases and does not weigh mutuality of obligation the way the tribunals do, so treat it as a starting point rather than a conclusion.
What happens if a determination turns out to be wrong?
For a medium or large client, the fee-payer is generally liable for the unpaid tax and NIC, with penalties possible. Since April 2024, HMRC can offset tax and NIC already paid by the contractor and their company against that liability, which substantially reduces the exposure compared with the earlier position. This is the kind of question to put to a tax adviser rather than a commercial one.
Talk it through
If your finance team needs the contractual side covered before a commercial conversation can happen, book a free 30-minute call and we will deal with it upfront rather than at contract stage.
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