Every contractor working through a limited company needs to know which set of IR35 rules governs their engagement, because it decides who is responsible for getting the IR35 decision right, and who carries the risk if it’s wrong.

The tests used to decide IR35 status remain the same, but it is not always the same party responsible for the decision: this rests with you under Chapter 8, or with your client under Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The Chapter 8 vs Chapter 10 IR35 distinction is the first thing that needs to be established before making any IR35 determination.

What’s the difference between Chapter 8 and Chapter 10?

Chapter 8 is IR35 in its original form, introduced in 2000. It places responsibility for the IR35 decision, and liability for any resulting tax and National Insurance, with the limited company contractor. You must consider each engagement based on its own facts and take reasonable care in establishing your status.

Chapter 10, introduced for the public sector in 2017 and extended to medium and large private sector clients in 2021, is commonly known as the Off-Payroll Working rules (OPW). Under Chapter 10, your client decides your IR35 status and must issue a Status Determination Statement (SDS) setting out its decision and reasoning. If IR35 is deemed to apply, the fee payer (either the client, or agency if there is one) must deduct taxes from the payments at source.

Who holds the IR35 responsibility for your engagement?

This is decided by your client’s type and size, not by anything about the contract itself:

Client type	Chapter that applies	Who determines your status	Who is liable if it’s wrong
Public sector body	Chapter 10 (OPW)	Your client	Your client / the fee-payer
Medium or large UK private sector company (Companies Act 2006 definition)	Chapter 10 (OPW)	Your client	Your client / the fee-payer
Small UK private sector company (Companies Act 2006 definition)	Chapter 8	You	You
Wholly overseas client with no UK connection	Chapter 8	You	You

A small or overseas client doesn’t mean IR35 doesn’t apply

This point seems to catch contractors out. If your client is a small company or based wholly overseas, the IR35 status must still be established for your engagement. Nothing about the small company or overseas position changes how IR35 and employment status is determined: factors such as control, substitution, mutuality of obligation and the wider working picture apply in exactly the same way under Chapter 8 as under Chapter 10.

All that changes is who is responsible for making that assessment, and who is liable if it’s wrong. Chapter 8 arguably leaves you more exposed, because there’s no client-issued SDS standing between you and HMRC – the decision, the evidence and the liability all sit with you.

Chapter 10: the risks when your client decides

Responsibility for the decision sits with your client under Chapter 10, but that doesn’t mean you should leave it entirely in their hands. Possible scenarios you may deal with:

• Blanket determinations: some engagers apply a single inside IR35 decision across the board instead of assessing each engagement individually. This falls short of the reasonable care requirement, and you have the right to challenge an inside IR35 determination if you do not agree.
• An SDS that doesn’t reflect reality: it only carries weight if its reasoning aligns with your actual working practices, not just the contract wording. CEST determinations can be particularly problematic and many of the questions are widely misunderstood.
• Contracts not supporting the determination: the written terms need to reflect the same arrangements as the SDS itself; clauses on control, substitution or mutuality that conflict can undermine an outside IR35 determination even where your day-to-day working practices are fine.
• Assuming the SDS removes all your risk: it shifts primary liability to your client and fee-payer, but doesn’t automatically protect you if the arrangement is later shown to be a sham.
• Tax indemnities in the contract: these are common in Chapter 10 engagements and don’t change who is legally liable, however it does give your client a separate contractual right to try to recover its own tax loss from your company if it’s ever found liable. Enforceability is often questionable, since the clause is attempting to shift a liability the legislation deliberately places elsewhere, but that’s a matter of contract law rather than something to assume.

If you want to check whether your client’s SDS can be relied upon, see our guide on what to check if your client says you’re outside IR35.  We also have guides on what a Status Determination Statement should include and how to appeal a determination you disagree with.

Chapter 8: the risks when you decide

If your client is a small company or wholly overseas Chapter 8 applies, the position is considerably more exposed.

• Full liability sits with you: if HMRC later concludes an engagement was inside IR35, you are responsible for the associated tax and National Insurance, plus interest and possibly penalties. As historic IR35 cases show, these can amount to life-changing figures.
• You must evidence care in establishing your position: that means you must be able to demonstrate, based on the facts, why and how you decided your engagement was outside IR35.

If you are unsure whether your engagement sits inside or outside IR35, an independent and evidenced IR35 contract and working practices review can be excellent evidence to support your position when Chapter 8 applies.

What should you do next?

• If Chapter 10 applies, firstly ensure you have the SDS before you sign the contract. Then, ensure that everything aligns – the SDS, the actual working practices, AND the contract wording. Ask for any tax indemnities in the contract to be removed or narrowed.
• If Chapter 8 applies due to your client being small or wholly overseas, consider an independent review if you are not sure about your status.
• If you’re not sure which chapter applies, ask your client directly and get the answer in writing so you are clear on your responsibilities and obligations.

Our expert IR35 Contract Review does everything for you – we establish who is responsible, what the IR35 position is, and negotiate changes to the contract where necessary. This ensures the contract supports your position and correctly allocates any tax risks.  

Chapter 8 vs Chapter 10 IR35: frequently asked questions

Does IR35 still apply if my client is a small company? Yes. Chapter 8 simply makes you responsible for deciding your own status and any resulting tax, rather than your client.

Who decides my IR35 status if my client is based overseas? If your client is wholly overseas with no UK connection, Chapter 8 applies and you are responsible for determining your own status.

How do I know whether Chapter 8 or Chapter 10 applies to me? It depends on your client’s size and location. If you are not sure on your client’s size or if they have a presence in the UK, ask them to confirm it in writing.

What happens if my small company client grows and stops being exempt? Responsibility shifts to your client under Chapter 10 once it’s exceeded the size thresholds for two consecutive financial years (or sooner if a small company is acquired by a larger one). Further information can be found in HMRC’s guidance here.

Whichever chapter applies to your engagement, an outside IR35 determination is only as strong as the evidence behind it.

Visit our IR35 Hub for further guidance on the rules and how they apply to you.

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