IR35 & CIS · Off-Payroll Rules
IR35 and CIS: Why They're Not the Same Thing — And Why It Matters
Being registered for CIS does not protect you from IR35. They are two completely separate rules with completely different consequences — and confusing them is one of the most expensive mistakes a construction subcontractor can make.
If a contractor has ever asked whether you're "IR35 compliant" and you weren't entirely sure what to say, you're not alone. IR35 is one of the most misunderstood areas of UK tax law — particularly in construction, where CIS gives many subcontractors a false sense of security. CIS registration tells HMRC how to collect your tax. IR35 determines how much tax you owe in the first place. One does not replace the other.
The Core Difference — In Plain English
Think of it this way: CIS is a payment mechanism. It's the system that requires your contractor to deduct 20% (or 30% if you're not registered) from your invoice and send it to HMRC as an advance against your tax bill. CIS says nothing about whether you're self-employed, employed, or anything in between. It simply controls how the money flows.
IR35 is an employment status test. It asks one question: if you didn't have a limited company or intermediary between you and the contractor you work for, would HMRC treat you as that contractor's employee? If the answer is yes — or if HMRC decides the answer is yes — you're "inside IR35," and the tax consequences are significantly more expensive than operating outside it.
IR35 only applies if you're working through a limited company. If you're a sole trader, IR35 doesn't apply to you directly — though HMRC can still challenge your self-employment status through other routes.
CIS tells HMRC how to collect your tax. IR35 tells HMRC how much tax you owe. Being registered for one tells you absolutely nothing about your position on the other.
CIS Tax Insights · 2026CIS vs IR35 Side by Side
Applies to anyone providing construction services in the UK, sole trader or limited company. Contractors deduct tax at source and pay it to HMRC on your behalf.
- Applies to sole traders and limited companies equally
- Deduction rate: 0% (Gross Payment Status), 20% (registered), 30% (unverified)
- Deductions are advance payments — reconciled via Self Assessment
- Says nothing about whether you're employed or self-employed
Applies only to individuals working through a limited company or other intermediary. Determines whether the relationship is genuinely self-employed or effectively employment.
- Only applies to limited company directors — not sole traders
- If inside IR35: employment taxes deducted before payment
- If outside IR35: normal CIS treatment, company tax advantages apply
- Overrides CIS — IR35 takes precedence if both apply
What "Inside IR35" Actually Means in Practice
If a contract is determined to be inside IR35, the contractor or agency paying you must calculate and deduct income tax and National Insurance from your payment before it reaches your company — essentially treating you as an employee for tax purposes, even though you're not one legally.
Three factors drive most IR35 determinations in construction:
Supervision, Direction and Control (SDC): Does the contractor dictate exactly how, when and where you work — or do you have genuine autonomy? The more control the contractor has over your working methods, the more the relationship looks like employment.
Right of Substitution: Can your company send a qualified substitute to do the work instead of you personally, without the contractor's approval? A genuine right of substitution is one of the strongest indicators of self-employment.
Mutuality of Obligation: Is the contractor obliged to offer you work and are you obliged to accept it? If yes, the relationship looks more like employment than self-employment.
The Financial Impact: Outside vs Inside IR35
Here's what the difference looks like in real money for a limited company director earning £60,000 in contract revenue.
| Scenario | Approximate Net Income |
|---|---|
| Outside IR35 — normal CIS treatment, company tax structure | ~£46,000–£48,000 |
| Inside IR35 — employment taxes deducted at source | ~£36,000–£38,000 |
| Typical annual difference from IR35 status | £8,000–£12,000 |
The gap exists because outside IR35, a company director can draw a combination of salary and dividends, claim legitimate business expenses, and pay Corporation Tax on profits. Inside IR35, all income is treated as employment income — subject to both income tax and National Insurance, with none of the corporate flexibility.
This is the most important point in this article. The fact that a contractor is deducting 20% CIS from your invoices does not mean you're automatically outside IR35. HMRC can determine you're inside IR35 regardless of CIS registration. If that happens, you may owe additional employment taxes on top of the CIS deductions already made — creating a significant and unexpected tax bill.
What to Do if You Work Through a Limited Company
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Understand Whether IR35 Applies to Your Engagements IR35 only applies if you're working through a limited company. If you're a sole trader, you don't face IR35 — though HMRC can still challenge your self-employment status through other means. If you do operate through a limited company, every engagement you take on is potentially subject to an IR35 assessment.
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Ask for a Status Determination Statement From Your Contractor Medium and large contractors are legally required to assess your IR35 status and provide a written Status Determination Statement (SDS) explaining their conclusion. If you're working for a medium or large business and they haven't given you one, ask for it. Without one, the responsibility for getting the status right may default back to you.
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Review Your Actual Working Practices Against Your Contract IR35 is assessed on the reality of the working relationship, not just what the contract says. If your contract says you have a right of substitution but in practice the contractor would never allow it, the contractual term carries little weight. Your actual day-to-day working arrangements matter more than the wording alone.
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Get a Proper IR35 Review Before Signing a New Contract If you're unsure about a contract's IR35 status, an IR35 specialist or a qualified accountant familiar with construction contracting can review it and give you a reasoned opinion. This is worth doing before you start work — not after HMRC raises a question. The cost of a review is small compared to the cost of getting the status wrong.
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Keep Your CIS Records and IR35 Records Completely Separate Your CIS deduction statements, monthly vouchers, and Self Assessment are completely separate from any IR35 documentation. Never assume a clean CIS record means IR35 is taken care of — they are independent systems. Keep your Status Determination Statements, IR35 contract reviews, and related correspondence in a separate file from your CIS paperwork.
Frequently Asked Questions
I'm a sole trader registered for CIS. Do I need to worry about IR35?
IR35 in its current form (the Off-Payroll Working rules) applies specifically to individuals working through a limited company or other intermediary. As a sole trader, you don't face IR35 directly. However, HMRC can still challenge your self-employment status through other routes — particularly if the nature of your working relationship with a contractor looks more like employment than genuine self-employment. The three factors that matter (control, substitution, mutuality of obligation) are relevant to HMRC's view of sole trader status too, even if the formal IR35 rules don't apply.
If a contractor decides I'm inside IR35, can I disagree with their assessment?
Yes. If a medium or large contractor gives you a Status Determination Statement that you believe is incorrect, you have the right to dispute it through the contractor's formal disagreement process. The contractor must consider your representations and either maintain or change their determination, giving reasons. If you still disagree after that process, you can raise the matter with HMRC. Keep all correspondence in writing.
What's the difference between IR35 and being classed as a "disguised employee"?
These are related but distinct issues. IR35 (Off-Payroll Working) applies when a limited company director is doing work that looks like employment. "Disguised employment" or false self-employment is a broader HMRC concern that applies to sole traders and workers operating without a company — where someone is treated as self-employed by a contractor but the reality of the relationship is employment. Both involve the same underlying employment status factors, but the legal framework and who bears the risk differs. For sole traders, the contractor may face penalties for incorrectly treating you as self-employed.
Can I be inside IR35 for one contract and outside for another?
Yes — IR35 is assessed contract by contract, not across your entire work pattern. You could be outside IR35 on a contract with genuine autonomy and right of substitution, while being inside IR35 on a different contract where you're working under close supervision using the client's equipment. This is why each new contract needs to be assessed on its own merits, and why keeping documentation for each engagement separately matters.
People Also Ask
Does being registered for CIS protect me from IR35?
No. CIS and IR35 are completely separate rules. CIS determines how tax is collected from your invoices. IR35 determines whether you should be paying employment-level tax regardless of your business structure. CIS registration provides no protection from an IR35 determination — HMRC can find you inside IR35 even if CIS deductions are being made correctly.
Does IR35 apply to CIS sole traders?
IR35 in its current form — the Off-Payroll Working rules — applies specifically to people working through a limited company. As a CIS sole trader, you are not subject to IR35 directly. However, HMRC can still challenge your self-employment status through other routes if your working arrangement looks like employment.
What is a Status Determination Statement in construction?
A Status Determination Statement (SDS) is a written assessment issued by a medium or large contractor stating whether your engagement is inside or outside IR35. Contractors are legally required to provide one and give reasons for their conclusion. If you disagree with the determination, you have the right to dispute it through the contractor's formal process.
How much does being inside IR35 cost a CIS contractor?
For a limited company director earning £60,000 in contract revenue, being inside IR35 typically reduces net income by £8,000–£12,000 per year compared to operating outside IR35. This is because inside IR35, all income is treated as employment income — subject to both income tax and National Insurance, with no ability to use a salary/dividend combination or claim company expenses in the same way.
Two Rules, Two Different Questions
CIS answers the question: how does tax get collected from construction payments? IR35 answers a completely different question: should this person be paying employment-level taxes regardless of their business structure?
If you operate as a sole trader, CIS is what matters for your tax position and IR35 is largely not your concern — though employment status remains relevant. If you operate through a limited company, both matter, and understanding the interaction between them is essential before you take on a new contract.
When in doubt: ask your contractor for a Status Determination Statement, review your actual working practices against the key IR35 factors, and speak to an accountant who understands construction contracting specifically. The cost of getting this wrong is measured in thousands of pounds, not hundreds.
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This article is for informational purposes only and does not constitute formal accounting, legal, or tax advice. IR35 status depends on the specific facts of each engagement and is assessed on a contract-by-contract basis. Always consult a qualified accountant or IR35 specialist before making decisions about your business structure or employment status. Aligned to 2026/27 HMRC guidance.