What is IR35?
IR35 (also known as Chapter 8/10 ITEPA 2003) is tax legislation that determines whether a contractor working through a limited company should be taxed as an employee. It significantly impacts take-home pay — the difference between inside and outside IR35 can be £40,000+ per year for a fractional executive.
Why Most Fractional Executive Engagements Should Be Outside IR35
- Multiple clients: You work across 2-5 clients simultaneously (mutuality of obligation test fails)
- Control your schedule: You decide how and when the work is done (control test)
- Not embedded: You are not embedded as a quasi-employee in one organisation
- Substitution rights: You can send a substitute in some circumstances
- No employee benefits: You don't receive holiday pay, sick pay, or other employee benefits
Key advantage: The fractional model inherently supports outside IR35 status because you're genuinely running your own business across multiple clients, not filling an employee role.
The Three IR35 Tests Explained Simply
1. Control Test
Question: Does the client control how, when and where you work?
Fractional executives: You set your own schedule across multiple clients, choose your working methods, and operate strategically rather than being directed day-to-day. This usually points outside IR35.
2. Mutuality of Obligation (MOO)
Question: Is the client obliged to offer work and are you obliged to accept it?
Fractional executives: Your engagements are typically project/retainer-based with no guaranteed work stream. You can refuse additional work. This points outside IR35.
3. Substitution
Question: Could you send a substitute to do the work?
Fractional executives: While personal service is often expected at C-suite level, many fractional contracts permit substitution with client approval. This supports outside IR35.
Financial Impact — Concrete Calculation
Take-Home Pay Comparison at £1,000/day
Outside IR35 (Ltd Company)
~£700/day
After corporation tax and dividends
Inside IR35 (PAYE)
~£523/day
After income tax and NI
Difference: £177/day = £42,500/year at 2 days/week × 48 weeks
Off-Payroll Rules for Medium/Large Clients
Since April 2021, medium and large companies must determine IR35 status before engaging a contractor. The size criteria are (must meet two of three):
- Annual turnover over £10.2 million
- Balance sheet total over £5.1 million
- More than 50 employees
Small companies: If the client is below these thresholds, the contractor self-determines IR35 status.
How Fractional Engagements Are Typically Structured
Best practice: Most fractional executive engagements through fractional.quest are structured as outside IR35 — multiple clients, flexible schedule, no employee-level control. However, we recommend all fractional executives obtain a contract review from an IR35 specialist before each new engagement.
HMRC's CEST (Check Employment Status for Tax) tool is a useful first check but has limitations. It doesn't consider all factors and can give inconclusive results. Professional advice is always recommended.
Common Mistakes Fractional Executives Make with IR35
Recommended Next Steps
- 1. Use HMRC's CEST tool: Get an initial assessment at gov.uk/check-employment-status-for-tax
- 2. Review your contracts: Ensure they support outside IR35 status (no MOO, limited control, substitution rights)
- 3. Get professional advice: Consult an IR35 specialist for contract reviews, especially for high-value engagements
- 4. Document your working practices: Keep evidence of multiple clients, business expenses, and independent working