Freelancer Contracts and IR35 — Complete Guide 2026

Freelancer vs employee — why it matters

Getting employment status wrong is one of the most expensive mistakes a business can make. HMRC has successfully recovered hundreds of millions of pounds from businesses that incorrectly treated workers as self-employed freelancers when they were actually employees or workers in law.

The consequences of getting it wrong:

• Back-payment of income tax and national insurance
• Interest and penalties on unpaid tax
• Employment rights claims (unfair dismissal, holiday pay, etc.)
• IR35 assessments covering multiple years

IR35 — the off-payroll working rules

IR35 applies to contractors who work through their own limited company (Personal Service Company or PSC). Since April 2021, medium and large businesses are responsible for determining whether contractors are inside or outside IR35 — not the contractor. Separately, from April 2026 agencies (or the end client, where there is no agency) are jointly liable for PAYE that an umbrella company fails to pay.

The three key IR35 tests

• Personal service: Can the contractor substitute another person to do the work without your approval? A genuine right of substitution points strongly to outside IR35.
• Control: Do you control where, when, and how the contractor works? High control points inside IR35.
• Mutuality of obligation: Are you obliged to offer work and the contractor obliged to accept? Ongoing obligation with no defined end point points inside IR35.

Status Determination Statement (SDS)

Medium and large businesses must provide a Status Determination Statement to every contractor before engagement begins. The SDS must state inside or outside IR35 and give reasons. The contractor can disagree and the business must respond within 45 days. Keep all SDS records — they are your evidence in any HMRC dispute.

What a good freelancer contract includes

• Clear project scope and deliverables — not a job description
• Right of substitution clause — contractor can send a suitable substitute
• No control clauses — avoid language about working hours, methods, or supervision
• Payment by invoice — not salary, not PAYE
• Equipment — contractor uses their own equipment where possible
• Financial risk — contractor bears risk of rectifying defective work at their own cost
• No exclusivity — contractor is free to work for other clients