What this is, and what it is not
This is not tax advice and it is not a status determination. I am not going to tell you whether your engagement is inside or outside the rules, because that depends on facts I cannot see and because getting it wrong is expensive for you rather than for me. For that, talk to an accountant or a specialist adviser, and read the source: HMRC's own guidance on understanding off-payroll working.
What this is: the story of what IR35 did to the UK market for senior independent work, and why I think fractional consulting as we know it would not exist without it. The specialists will fight you on the legislation. Almost nobody writes the part that actually determines what you should do with your career.
Seventeen years of a rule nobody applied
The rules were introduced in 2000. Their purpose has never changed: to make sure somebody working like an employee, but through their own company, pays broadly the same income tax and National Insurance as an employee would.
The first time I heard the phrase would have been around 2001 or 2002, when there was a paper published about what was then called umbrella contracting and a certain amount of panic about it. My reaction at the time was that the only people who would really benefit were the large consultancies. I will come back to that.
For its first seventeen years the rule was close to inert, for a reason that is obvious in hindsight: the person making the determination was the person who benefited from the answer.
Under the original design, the contractor's own company decided whether an engagement was inside or outside. So as providers, we all said outside. And nobody could do very much about it, because challenging a determination meant HMRC taking on individual contractors one at a time, through the courts, at enormous cost per case.
The government's response, eventually, was not to argue harder. It was to make it somebody else's problem.
The risk reversal, and why it broke everything
Reform moved the determination to the client, along with the tax risk of getting it wrong.
| When | What changed |
|---|---|
| 2000 | Rules introduced. The worker's own company determines status |
| April 2017 | Public sector clients become responsible for determining status |
| April 2021 | Medium and large private sector clients become responsible. Delayed twelve months from April 2020 because of the pandemic |
Since those reforms, a client in scope must decide the worker's employment status for tax and issue a status determination statement setting out its reasons. If the engagement is inside, the deemed employer deducts income tax and employee National Insurance from the fees paid to the worker's company, and pays employer National Insurance on top. The details are in HMRC's guidance for clients.
Read that once more from the client's side. You are a large organisation. You now have to make a technical employment status judgement on every contractor you engage, individually, and if you get it wrong the tax bill is yours.
What happens next is not a mystery and it is not malice.
Rather than do the hard job of assessing each engagement legitimately, most organisations defaulted to the safest available answer. Whole industries decided that everything was inside IR35 and they were not taking the risk. Some large employers stopped engaging limited companies at all. The determination was supposed to be made on the facts of each arrangement, and instead it was made once, centrally, as policy.
That was the moment the contract market stopped working. Not the introduction of IR35 in 2000. The reversal of who carried the risk.
What it did to rates
The following is my own observation from hiring and from contracting, not market research, and I would not want it quoted as though it were a dataset.
Around 2012 I was paying north of £1,500 a day for a senior programme manager in central London. The equivalent role now advertises at something closer to £600 - and increasingly it advertises inside IR35, which means that £600 is a gross figure taxed as employment before it reaches anybody.
Take those two together and the arithmetic is brutal. The end rate on a lot of inside engagements now sits below what the permanent equivalent would pay, while the person taking it still carries all the insecurity, all the gaps between contracts and none of the benefits.
That is what people mean when they say the contract market was decimated. It was not that the work disappeared. It is that the premium for taking the risk disappeared, and the risk did not.
IR35 was not the only cause and I would not claim it was. Remote working removed the geographic limits on who could apply for anything. The recruitment industry became transactional and stopped maintaining relationships with the people it placed, so contractors stopped moving smoothly from one engagement to the next. AI arrived on both sides of the hiring process at once. But IR35 is the one that took the money out.
The part nobody says: it built this market
Here is the argument I have not seen anybody else make, and I believe it is the most important thing on this page.
Had IR35 reform not happened, I do not think the fractional market would exist in the form it does.
Follow the logic from the contractor's side. Day rates collapse. Blanket inside determinations spread. The recruitment channel that used to keep you continuously placed stops working. You are experienced, expensive and no longer able to make a living the way you made it for fifteen years.
What do you do?
You cannot fix the rates. You cannot fix the agencies. What you can do is change what you are selling so that it is structurally not employment. Not part-time work, and not full-time work either - because both of those are still time, and time is what gets you treated as an employee.
So you sell outcomes instead. You price on value rather than days. You take several clients at once instead of one. You work on your own paper. And the reason you do all of that is not idealism about business models. It is the only way to be certain you are not perceived as somebody's employee.
That is a description of a fractional practice, and it was arrived at by a generation of people who were pushed rather than pulled. In the UK, fractional was in large part an opportunity for contractors who had been hammered by the reforms to find a route to market that did not have the same problem attached to it. I am not an inside employee. I do not work on day-rate contracts. It is priced on value. I have several of them, no different to a plumber.
The rest of it - the positioning, the products, the language - came afterwards. The structural shape came first, and the rules gave it that shape.
And the prediction I made in 2002 turned out to be half right. The large consultancies did benefit, though not because they were exempt. Where a firm provides a genuine, fully contracted-out service, it is the client for off-payroll purposes rather than the organisation buying the outcome, so the rules land differently. That is a real distinction rather than a loophole, but the commercial effect was as expected: work moved towards firms that could package it as a service. What I did not foresee was that individuals would learn to package it as a service too. That is what a fractional product is.
Which is the whole argument of what a fractional consulting product actually is, and it is the difference between a practice and a day rate with better branding. Fractional vs contracting covers the same line from the other side.
What actually determines status
Briefly, because this is the part where the specialists are better than me and where being wrong is expensive.
The test is whether you would have been an employee had you provided the services directly to the client rather than through your company. It turns on the reality of the arrangement, not on what the contract is called or what job title you print on an email. Broadly, it looks at how far the client controls what you do and how you do it, whether you have to do the work personally, and the nature of the obligation between the two parties.
Two features of the regime matter more to a fractional than the tests themselves.
It is assessed contract by contract. You can hold engagements that fall on different sides of the line at the same time, and a change to the terms during an engagement means the question has to be looked at again. Nobody is inside or outside as a person.
Nothing about the word "fractional" is a status argument. There is no label you can apply that changes the analysis. A fractional engagement with a title, a fixed number of days a week, a line manager in all but name and a day rate attached is precisely the arrangement the rules were written for. HMRC's CEST tool is the starting point, not a defence.
Why a practice looks different from a contract
Which brings us to the useful part, and to a conversation I had years ago that has stayed with me.
I was going through due diligence with a very large insurer. They were desperate to give me a title, and they said, in terms, we need a title because of IR35.
And I said: it is because of IR35 that you do not need a title.
The moment I have a title, you are inferring a level of ownership. You are describing a role inside your organisation, which is exactly the thing that puts the arrangement at risk. Whereas as long as what we both say is that I am providing consultancy-based guidance on a defined topic, the picture is consistent with what is actually happening.
They accepted it, and it went through.
I am not offering that as a technique, and it is not a form of words that fixes an arrangement which is employment in substance. The point is the direction of the thinking. Most people treat the rules as an obstacle to get past on the way to the engagement they had already imagined. The better question is whether the engagement you are describing is one you should be selling at all.
An outcome-priced piece of work - proposal, scope, fixed price, defined deliverable - has a completely different shape. There is no correlation between what you are paid and the hours you spend. Nobody owns your time. There is no employer sense of ownership, because there is nothing in the arrangement that looks like ownership. That is not a workaround; it is a different product.
And having several genuine clients helps, without being determinative. It does not make any individual engagement outside the rules - the determination is still made engagement by engagement. What it does is make the surrounding facts consistent with running a business, which is a great deal easier to demonstrate than to assert.
The good news, and I have watched it arrive: large organisations that I never expected to move this way have started buying off-payroll provision as a service rather than as a headcount. Two of the biggest I have worked with now do exactly that. The market is moving towards the shape a fractional practice already has.
The small client rule, and what changes in April 2026
This is the part of the regime least understood by the people it most affects, and there is something happening in it right now.
The client-decides rule applies to the public sector, and to medium and large clients in the private sector. It does not apply to small ones. Where the client is a small private sector business, responsibility for determining status stays with the worker's own intermediary - which is to say your own limited company decides, as it did before 2021. HMRC sets this out in its guidance for intermediaries providing services to small clients.
Now consider who a fractional actually sells to. Founder-led businesses. Scale-ups. Private-equity-backed companies of thirty or eighty people. Owner-managed firms with a leadership gap. A very large proportion of fractional work is done for clients that fall under the small company test, which means a very large proportion of it sits in the part of the regime where nobody was ever going to issue you a blanket inside determination.
That is not an invitation to be careless. Determining your own status means being responsible for getting it right, and the deemed employment payment calculation exists for the cases where it is wrong. It does mean the blanket-determination problem that broke day-rate contracting largely does not reach this end of the market.
And the small end just got bigger. The company size thresholds rose from 6 April 2025: a client is small if it meets two of three tests - turnover of not more than £15 million, a balance sheet total of not more than £7.5 million, and not more than 50 employees. Because size is judged by reference to previous years, HMRC's own note says the change has no practical effect on off-payroll working until 6 April 2026 at the earliest, and expects around 10,000 businesses to fall out of scope when it does. The detail is in HMRC's employment status manual.
Ten thousand organisations moving from making the determination to not making it, in the current tax year. If you sell to mid-market UK businesses, some of the clients who could not engage your company two years ago are in a different position now, and almost nobody has told them.
If you take an inside engagement
Sometimes you will, and I am not going to be pious about it. Pound for pound, day-rate contracting pays the bills, and there is nothing noble about turning down income you need.
What an inside engagement is not is your business model. It is taxed as employment, priced accordingly, and it positions you as contract labour rather than as a practice - which matters because the next client's perception of you is shaped by what you did last.
The real cost is subtler and it is the one I watch people pay. An inside engagement consumes exactly the time you would otherwise spend creating your own clients. You get busy, business development stops, visibility stops, and when the engagement ends you are back at the beginning with a longer gap ahead of you than the one you started with. That cycle is what most people leave contracting to escape, and taking one more contract is how they re-enter it.
If you take one, take it deliberately, put a boundary round it, and keep building alongside it. It is a job you took for a period. It is not what you are.
The same applies to umbrella arrangements, which exist to service exactly this situation and are the wrong vehicle for a practice.
Hoping is not a plan
One last thing, because it is the attitude I encounter most often and it worries me.
I spoke to a contractor recently who had been on the same engagement with the same client for seven years. I asked whether he worried about IR35 at all.
He said no. It will be fine until it is not, and then it is not my problem.
He may well be right about where the liability sits, depending on the arrangement and who determined it. He is certainly wrong about the shape of his working life. Seven years with one client, on their premises, in their process, is not a business with a client concentration problem - it is a job with a worse tax position and no notice period.
The point of getting this right is not compliance. It is that the arrangements which sit comfortably outside the rules are the same arrangements that make a good business. Outcome pricing, several clients, your own contracts, no title, no ownership of your time. Those are not defensive positions. They are what a practice is, and the rules simply reward it.
Build the practice, and the status question largely answers itself. Build a job with a limited company wrapped round it, and it will not.
Frequently Asked Questions
Does IR35 apply to fractional consultants?
The off-payroll working rules apply to anyone providing services to a client through their own limited company, so they are capable of applying to a fractional. What matters is that status is assessed contract by contract, on the reality of each engagement rather than on the label you use. Calling yourself fractional does not put you outside the rules, and a fractional engagement that looks like a part-time job with a title and a day rate can be caught.
Who decides whether an engagement is inside or outside IR35?
For public sector clients and for medium and large private sector clients, the client decides and must issue a status determination statement giving its reasons. For small clients outside the public sector, responsibility stays with the worker's own intermediary - your own limited company decides. Since a great many fractional clients are small businesses, this is the position a lot of fractional work actually sits in.
How did IR35 change the UK contract market?
For its first seventeen years the contractor's own company made the determination, and in practice most determined themselves outside. Reform moved that decision to the client - the public sector in April 2017, medium and large private sector clients in April 2021 - and made the client carry the tax risk of getting it wrong. Risk-averse organisations responded by defaulting engagements to inside rather than assessing each one, which took the value out of day-rate contracting.
Did IR35 create the fractional market?
It was one of the largest forces behind it in the UK. When day rates fell and blanket inside determinations spread, experienced operators had to find a way to work that was structurally not employment - selling outcomes rather than time, to several clients at once, on their own contracts. That is a description of fractional work. Recruitment industry decline, remote working and AI in hiring all pushed the same way, but IR35 is the one that made day-rate contracting stop paying.
What actually determines employment status for tax?
The test is whether you would have been an employee had you provided the services directly rather than through your company. It turns on the reality of the working arrangement rather than what the contract is called - broadly, how much the client controls what you do and how, whether you must perform the work personally, and the nature of the obligation between you. HMRC publishes the CEST tool for working through it, and a determination is specific to one engagement.
Should I take an inside IR35 engagement?
It is a commercial decision rather than a moral one, and taking one to pay the bills is not a failure. What it is not is your business model. Inside engagements are taxed as employment, priced accordingly, and position you as contract labour rather than as a practice. If you take one, treat it as a job you took for a period and keep building the practice alongside it, because an inside engagement absorbs the time you would otherwise spend creating your own clients.
Do multiple clients put me outside IR35?
No, not on its own. Status is determined separately for each engagement, so having four clients does not make the fifth one outside the rules. What having several genuine clients does is make it easier to demonstrate that you are running a business rather than working as somebody's employee, because the surrounding facts support it. It is evidence rather than a rule, and the determination still rests on the specific arrangement.
Where to go from here
Two things worth acting on.
If you sell to mid-market UK businesses, look again at clients who could not engage your company two years ago. The size thresholds moved, the effect lands from April 2026, and roughly ten thousand organisations are expected to move out of scope. That is a live commercial opening and it has an expiry date on the attention it will get.
And stop treating status as something to argue your way through. The engagements that sit comfortably outside the rules are the same engagements that make a good business - priced on outcomes, several at a time, on your own paper. Get the business right and the question mostly stops being interesting.
The practical next steps are the contract, the company structure and the product you sell.
The State of Fractional Consulting is free and it goes deeper on this. The report tracks the regulatory picture across all seven markets, including a page of changes that are already law with the dates they take effect - the 6 April 2026 threshold rise among them. Free, and every figure sourced to the statistics office or tax authority it came from.
The Fractional Formula builds the commercial side - ICP, offer, profile, pipeline and price - in six weeks. Pieces like this one go out first in Fractionally Thinking, every Friday.
