IR35 and Fractional Executives: What UK Founders Need to Know Before Hiring

IR35 is UK tax legislation designed to prevent what HMRC calls disguised employment: where an individual works like an employee but routes their income through a limited company to pay less tax. It does not prohibit fractional hiring. It determines how that hiring relationship should be taxed.

For UK founders engaging fractional executives, the practical question is: who is responsible for determining whether the engagement falls inside or outside IR35, and what happens if it falls on the wrong side?

Inside IR35 vs Outside IR35: What It Actually Means

If an engagement is inside IR35, the fractional executive must pay income tax and National Insurance Contributions at roughly the same rate as an employee. The tax treatment mirrors employment, even if the legal structure does not.

If an engagement is outside IR35, the executive is treated as a genuine independent business. They can operate through their own limited company, extract income as a mix of salary and dividends, and are not subject to PAYE deductions at source.

The determination comes down to three tests that HMRC applies to the working relationship, regardless of what the contract says:

Control

Does the client dictate how, when, and where the work is done? A fractional executive who sets their own hours, works across multiple clients, and operates with genuine strategic autonomy scores well here. One who is expected to attend daily stand-ups, follow internal processes, and report to a line manager starts to look more like an employee.

Substitution

Can the executive send a qualified substitute to complete the work if they are unavailable? A genuine right of substitution, where the client accepts a replacement without selecting the individual themselves, points strongly to outside IR35. In practice, most fractional executives do not exercise this right, but having it written into the contract matters.

Mutuality of obligation

Is the client obliged to keep offering work, and is the executive obliged to accept it? A fractional engagement structured around a defined scope of work, with no expectation of ongoing availability beyond what is agreed, sits comfortably outside IR35 on this test. An open-ended arrangement where the executive is expected to be continuously available looks more like employment.

Fractional executives working across two or three concurrent clients, with defined deliverables, genuine autonomy, and no ongoing obligation beyond the agreed scope, typically sit clearly outside IR35. The structure of the engagement matters more than the job title.

Who Is Responsible for the Determination?

This is where most UK founders get confused, and where the rules have recently changed in ways that matter.

Since 2021, the off-payroll working rules (the formal name for the IR35 reforms) have placed the responsibility for determining IR35 status on the end client, not the contractor, for medium and large private sector businesses. If your company falls into that category, you are required to issue a Status Determination Statement (SDS) and, if the engagement is inside IR35, ensure that PAYE is operated correctly.

Small companies are exempt from this obligation. For small clients, the IR35 determination remains with the contractor's limited company, as it was under the original rules.

What counts as a small company?

A company qualifies as small for off-payroll purposes if it meets at least two of the following three conditions based on its most recent financial year:

Annual turnover of no more than £15 million (up from £10.2 million from April 2026). Balance sheet total of no more than £7.5 million (up from £5.1 million from April 2026). Fewer than 50 employees on average.

The threshold increases take effect for accounting periods beginning on or after 6 April 2025, but because the off-payroll rules use the prior financial year to determine size, the practical effect for most businesses will be felt from April 2026 or April 2027 depending on their accounting period.

From April 2026, an estimated 14,000 additional UK companies will move from the medium category to the small category, taking them outside the scope of the off-payroll rules. If your company is close to those thresholds, it is worth checking whether you are now exempt.

Why Fractional Executives Typically Sit Outside IR35

Fractional executives are structurally well-positioned to sit outside IR35, for reasons that go beyond contract drafting.

A genuine fractional engagement is built around outcomes, not hours. The executive is engaged to deliver a defined function or strategic outcome, not to fill a seat in the organisational chart. They work across multiple clients simultaneously, which is one of the clearest signals of genuine independent business activity. They set their own working hours and methods. There is no expectation of ongoing availability once the agreed scope is complete.

This structure sits in clear contrast to what IR35 is designed to catch: an individual who effectively works as a full-time employee for a single client but uses a limited company to reduce their tax liability. A fractional CFO working two days a week across three different businesses, each on a defined retainer with separate deliverables, is not that person.

That said, the working practices need to match the contract. If a fractional executive is treated in practice like a full-time hire, attends daily team meetings, has a company email address, and works exclusively for one client for an extended period, the engagement starts to look like employment regardless of what the paperwork says. HMRC looks at the reality of the relationship, not just the contract.

What Founders Should Do Before Hiring

IR35 compliance does not require an army of advisors or months of preparation. For most fractional engagements, a few practical steps are sufficient.

Determine your company size

If your business qualifies as small under the thresholds above, the IR35 determination is the contractor's responsibility, not yours. You should confirm your size to the executive or agency if asked. If you are medium or large, you are responsible for issuing a Status Determination Statement before the engagement begins.

Use a statement of work, not a role description

The single most practical step a founder can take is to structure the engagement around a statement of work with defined deliverables, rather than a job description with defined duties. A fractional COO engaged to build an operations framework and hire the first three operational hires is clearly outcome-focused. A fractional COO engaged to manage day-to-day operations indefinitely looks more like an employee.

Avoid embedding the executive into your employment infrastructure

Give the executive a company email address, add them to the org chart, require them to attend all-hands meetings, and list them on your LinkedIn as a team member, and you have created evidence that the relationship is employment in everything but name. None of these steps are necessary for an effective fractional engagement.

Use HMRC's CEST tool if you are a medium or large client

HMRC's Check Employment Status for Tax (CEST) tool was updated in April 2025. For medium and large businesses required to make a determination, running the engagement through CEST and retaining the output provides a defensible paper trail. HMRC has committed to stand by CEST determinations where the information entered was accurate.

Work with a platform that structures engagements correctly

Engaging a fractional executive through a platform like Fractionus means the contract structure, scope definition, and payment terms are already built around genuine independent business engagement. There is no ambiguity about the nature of the relationship. The executive operates through their own entity, is engaged for a defined scope, and is not embedded into your employment infrastructure. For founders who want the compliance layer handled as part of the process, this matters.

You can review typical fractional executive costs in the UK to understand what a well-structured engagement looks like from a commercial perspective, alongside the compliance one.

What Is Changing in 2026

Two significant changes take effect in April 2026 that UK founders engaging fractional talent should be aware of.

The first is the threshold increase described above. More businesses will qualify as small, shifting the IR35 determination back to the contractor and reducing the compliance burden on the client.

The second is the introduction of Joint and Several Liability (JSL) rules for umbrella companies. From April 2026, where an umbrella company fails to correctly operate PAYE and NICs, HMRC will be empowered to pursue unpaid liabilities from agencies and end clients in the supply chain, not just the umbrella company itself. This is less directly relevant to most fractional executive engagements, where the executive operates through their own limited company rather than an umbrella, but it is worth being aware of if your supply chain involves any umbrella arrangements.

HMRC is also becoming more sophisticated in how it detects non-compliance. Its Connect system, upgraded with machine learning and AI capabilities, now crossmatches PAYE, corporation tax, VAT, and contractor filings to identify patterns associated with disguised employment. For businesses that have been casual about IR35 compliance, 2026 is a good time to tighten up.

The Bottom Line for UK Founders

IR35 is not a barrier to fractional executive hiring. For most well-structured fractional engagements, the risk is low and the compliance steps are straightforward. The founders who run into problems are typically those who treat a fractional executive like a part-time employee and hope the paperwork protects them.

Structure the engagement around outcomes. Keep the working relationship genuinely independent. Understand whether you are a small, medium, or large client under the current rules. And if you are a medium or large client, issue a Status Determination Statement before the engagement starts.

Done correctly, fractional hiring gives UK businesses access to CFO, CMO, COO, CTO, and CHRO level capability without the overhead of a full-time hire and without meaningful IR35 exposure.

If you are ready to explore what a fractional engagement could look like for your UK business, you can review fractional executive costs in the UK or get in touch with Fractionus directly to discuss your requirements.


This article is for general informational purposes and does not constitute legal or tax advice. UK tax law is subject to change. You should seek independent professional advice before making decisions about IR35 compliance.