IR35 Rules for Senior Executive Engagements in the UK

IR35 Rules for Senior Executive Engagements in the UK

IR35 is the UK tax legislation that determines whether an individual working through an intermediary — typically a personal service company — is genuinely self-employed or whether the engagement is in effect employment that should be taxed accordingly. The rules apply across many sectors but have particular implications for senior executive engagements where interim, fractional, and non-executive structures are commonly used.

This guide sets out how IR35 applies to senior executive engagements in the UK, what the determination depends on, who bears responsibility for getting it right, and how senior interim and fractional arrangements are typically structured to remain compliant.

What IR35 Actually Covers

IR35 — formally known as the off-payroll working rules — addresses arrangements where an individual provides services through an intermediary in a way that, absent the intermediary, would constitute employment. The classic case is a contractor who works through their own limited company but in practice operates as if employed by the client — reporting to client management, working set hours, using client equipment, and lacking the substitution rights and commercial risk that characterise genuine self-employment.

The legislation was introduced in 2000 and has been amended several times. The most consequential change came in April 2017 (public sector) and April 2021 (medium and large private sector firms) when responsibility for determining IR35 status shifted from the contractor to the engaging firm. Before 2021, the contractor’s own limited company determined status; after 2021, the engaging firm makes the determination at most engagements above the small business exemption threshold.

HMRC publishes guidance on the rules at the Off-payroll working (IR35) guidance page on GOV.UK, alongside the CEST tool that firms can use to assess specific engagements.

How IR35 Applies to Senior Executive Engagements

Senior executive engagements fall into several categories under IR35.

Interim CEO, CFO, COO, and equivalent senior interim roles typically operate as employment-like engagements regardless of how they are structured. The interim CEO who runs the firm for six months while a permanent CEO is recruited has direct managerial responsibility, reports to the board, takes operational decisions on behalf of the firm, and operates as if they were the firm’s CEO. These engagements almost always fall inside IR35 — meaning PAYE and NIC apply.

Fractional CFO, CMO, COO, and equivalent fractional senior roles require careful structuring. A fractional CMO working two days per week with a single client across a defined scope of work, delivering specific outputs against a service agreement, with substitution rights and commercial risk, may genuinely be outside IR35. A fractional CMO working two days per week for the same client over years, integrated into the firm’s leadership team, reporting to the CEO, and operating as part of the firm’s senior leadership, is more likely to fall inside IR35 despite the fractional structure.

Non-Executive Director roles generally fall outside IR35 because NEDs are office holders rather than service providers. NED fees are typically subject to PAYE through the firm’s payroll rather than through IR35 mechanics. The position is different for NED-equivalent advisory roles structured as service contracts — those are subject to IR35 analysis on their specific facts.

Advisory and consulting roles with defined deliverables, multiple clients, and genuine commercial independence typically operate outside IR35. A senior executive providing advisory services to several firms simultaneously, with each engagement focused on specific deliverables, with substitution rights and commercial risk, is operating as a genuine business rather than as a quasi-employee.

The Determination Tests

HMRC’s assessment of IR35 status looks at the working arrangement as a whole, but three core tests anchor the analysis.

Personal Service and Substitution

A genuine business can provide services through anyone qualified, not just one named individual. If the engagement requires the named individual personally and there is no genuine substitution right, the engagement looks like employment. Substitution clauses in contracts are common but only meaningful where they could realistically be exercised — a substitution right for a CEO role is rarely real because the personal characteristics of the candidate are typically central to why the firm engaged them.

Mutuality of Obligation

Employment involves the employer being obliged to provide work and the worker being obliged to do it. Genuine self-employment lacks this mutuality — each engagement is a discrete commercial arrangement without ongoing obligation. Long-standing fractional or interim engagements often develop mutuality of obligation over time, with the client expecting continued availability and the executive expecting continued work.

Control

Employees are typically controlled by their employer — on what they do, how they do it, when they do it, and where they do it. Genuine self-employment involves the worker having control over these dimensions. A senior interim CEO is controlled by the board in much the same way a permanent CEO is controlled, which points toward inside-IR35 status. A specialist advisor working on defined deliverables with their own methodology has more control, which points outside IR35.

Who Makes the Determination

The determination responsibility depends on the size of the engaging firm.

Medium and large engaging firms — defined as those meeting at least two of three thresholds: turnover above £10.2m, balance sheet above £5.1m, more than 50 employees — make the IR35 determination at the start of each engagement. The firm issues a Status Determination Statement to the individual and to the intermediary chain, setting out the conclusion and the reasons. The firm assumes tax liability if the determination is incorrect.

Small engaging firms — those not meeting the medium and large thresholds — pass the determination responsibility to the individual’s intermediary (typically their personal service company). The intermediary makes the determination and bears the tax risk if incorrect.

Most senior interim and fractional engagements at FCA-regulated firms, listed companies, and larger PE-backed businesses involve medium or large engaging firms making the determination. Smaller engaging firms — early-stage growth businesses, smaller family offices, smaller specialist regulated firms — may still pass the determination to the intermediary.

Inside vs Outside IR35: The Practical Implications

Inside-IR35 engagements are not commercially worse for the executive in all cases — they are simply taxed as employment. The headline fee for an inside-IR35 engagement is typically higher than the equivalent outside-IR35 arrangement to compensate for the different tax treatment. Many senior interim engagements are structured inside IR35 with appropriate fee adjustment from the start.

How Senior Interim and Fractional Engagements Are Typically Structured

The market has evolved several standard structures for senior interim and fractional engagements that work compliantly within IR35.

PAYE umbrella arrangements. The executive provides services through a PAYE umbrella company that handles the tax mechanics. The engaging firm pays the umbrella; the umbrella pays the executive after PAYE and NIC. This is inside-IR35 by structure. It is the cleanest arrangement administratively and avoids any individual IR35 analysis.

Limited company with formal SDS inside IR35. The executive provides services through their own personal service company. The engaging firm issues a Status Determination Statement confirming the engagement is inside IR35 and applies deemed payment mechanics — paying the company gross of CIT but net of PAYE and NIC, which is then accounted for in the company’s tax return.

Limited company with formal SDS outside IR35. The executive provides services through their own personal service company. The engaging firm issues a Status Determination Statement confirming the engagement is outside IR35. The company invoices gross; the executive draws compensation through dividend and salary mechanics within the company. This requires careful arrangement to ensure the engagement genuinely meets the outside-IR35 tests.

Direct PAYE employment. Some firms engage senior interim executives directly through their PAYE payroll rather than through any intermediary structure. The interim CEO is an employee for the duration of the engagement with fixed-term contract terms.

Common Pitfalls in Senior IR35 Arrangements

Three patterns recur in senior IR35 arrangements that produce HMRC challenges or commercial disputes.

Long-standing fractional engagements drifting into employment. A fractional CMO engagement that began as a discrete six-month consulting arrangement with defined deliverables can drift over years into something that looks more like part-time employment — the executive joins board meetings, has formal direct reports, holds the title formally, has a permanent place in the firm’s organisation chart. The IR35 status assessed at the start may no longer reflect the actual arrangement two years later.

Inadequate Status Determination Statements. The SDS must contain the firm’s reasoned conclusion. A boilerplate SDS that simply states “outside IR35” without reasoning carries higher tax risk than a properly evidenced determination. HMRC challenges to outside-IR35 determinations are more likely to succeed where the SDS lacks proper reasoning.

Substitution clauses without genuine substitution. Including a substitution clause in the contract does not protect outside-IR35 status if substitution could never realistically happen. HMRC and the tribunals look at whether substitution is genuine in practice, not whether it is documented in the contract.

IR35 and the Senior Recruitment Brief

Boards commissioning senior interim or fractional engagements should consider IR35 implications at the start of the brief rather than at the offer stage. Three questions matter at this point.

First, is the firm in scope for medium or large determination responsibility? If yes, the firm will need to issue an SDS at the start of the engagement and assume the associated tax risk. If no, the determination falls to the intermediary.

Second, what does the engagement actually look like? A genuine fractional CMO working across multiple clients with defined deliverables and substitution rights may sit outside IR35; an interim CMO embedded in the firm’s leadership team for a defined period is almost certainly inside IR35. The structure should match the reality.

Third, how does the cost work? Inside-IR35 engagements typically have higher headline fees to reflect the different tax treatment. Outside-IR35 engagements have lower headline fees because the executive retains more of each pound paid. The total cost to the firm and the net income to the executive both need to be considered in the brief.

What This Means for Senior Engagement Planning

Three implications follow for firms planning senior interim and fractional engagements.

Treat IR35 as part of the brief, not an afterthought. The IR35 implications affect the cost, the structure, and the operational mechanics of the engagement. Building IR35 into the brief at the start avoids surprises later.

Use proven structures where possible. PAYE umbrella arrangements and properly documented inside-IR35 limited company engagements are well-understood and low-risk. Outside-IR35 arrangements work for genuinely independent advisory or specialist engagements but require careful structuring and ongoing monitoring.

Document the determination properly. A well-evidenced Status Determination Statement protects the engaging firm against subsequent HMRC challenge. A boilerplate SDS provides less protection. The investment in proper determination documentation pays off if HMRC reviews the engagement.