IR35 Compliance for Structural Engineering Contractors: Latest Off-Payroll Working Rules and Guidance

Off-payroll working rules, often called IR35, ensure that a worker supplying services through a limited company or partnership pays broadly the same income tax and National Insurance contributions as an employee. IR35 compliance for structural engineering contractors was extended and now applies on a contract-by-contract basis. Structural engineering projects often involve long-term engagements with highly skilled contractors. If a contractor would have been an employee had they provided their services directly to the client, the contract may fall inside IR35. Failure to comply exposes companies to tax liabilities and penalties, so it is vital that structural engineering businesses understand the rules.

What is IR35?

IR35, also known as the off-payroll working rules, is UK legislation designed to identify whether a contractor is genuinely self-employed or working in a role that is effectively employment for tax purposes.

The rules apply when a contractor supplies their services through an intermediary, such as a personal service company (PSC), but would be regarded as an employee if they worked directly for the client. In this case, the contract is said to fall “inside IR35” and tax must be paid through PAYE.

For structural engineering contractors, IR35 is particularly important because projects are often long-term and involve close integration with client teams. If contracts are not reviewed properly, they may be classed inside IR35, creating liabilities for Income Tax and National Insurance.

Understanding what IR35 is and how HMRC applies its tests of control, substitution, and mutuality of obligation is essential for compliance. Structural engineering firms engaging contractors must also consider the interaction between IR35 and the Construction Industry Scheme (CIS), since IR35 takes precedence.

Which Clients Are Covered by IR35 Rules?

The off-payroll rules apply to all public-sector clients and to medium and large private-sector or voluntary-sector clients. A private or voluntary-sector business is considered medium or large if it meets two or more of the following conditions in its accounting period:

• Annual turnover over £10.2 million
  
• Balance sheet total (assets before liabilities) over £5.1 million
  
• More than 50 employees
  

Where a company does not meet two or more of these tests, and the simplified test or group rules do not apply, the business is classed as small. Small private-sector clients are not responsible for determining contractors’ employment status; that task falls to the worker’s intermediary. However, small clients must confirm their size when asked by their contractors or agencies to allow all parties to apply the correct rules.

Group companies: where a parent company is medium or large, its subsidiaries also need to apply the off-payroll rules.

Responsibilities of Structural Engineering Clients (Medium and Large Businesses)

Structural engineering firms that meet the size thresholds must assess whether each contract with a worker’s own intermediary falls inside IR35. Key duties include:

• Decide the worker’s employment status – using HMRC’s Check Employment Status for Tax (CEST) tool.
  
• Issue a Status Determination Statement (SDS) – with the outcome and reasoning, passed to the worker and contracting party.
  
• Take reasonable care and deduct tax until SDS is issued – including Income Tax, National Insurance, and Apprenticeship Levy.
  
• Maintain records and dispute procedures – keep detailed records of decisions, reasons, and fees; respond within 45 days to disputes.
  
• Reassess if circumstances change – review contract terms and working practices regularly.
  

Responsibilities of Contractors and Intermediaries

Structural engineers operating through personal service companies (PSCs) or partnerships must follow different responsibilities depending on client size:

• Small clients – the PSC must determine if the engagement falls inside IR35.
  
• Medium/large clients or the public sector – the client issues the SDS, which can be disputed if incorrect.
  
• Tax deductions – where inside IR35, payments are subject to PAYE deductions by the deemed employer.
  

Duties of the Deemed Employer (Fee-Payer)

The deemed employer (often an agency) must:

• Calculate the deemed direct payment.
  
• Operate PAYE and pay employer contributions.
  
• Apply the Apprenticeship Levy.
  
• Exclude student loan deductions, statutory payments, and pensions.
  
• Follow the disagreement process for incorrect SDS outcomes.
  

Key Tests HMRC Uses to Decide Employment Status

• Control – how, when, and where work is done; higher control suggests employment.
  
• Personal service and substitution – genuine substitution rights point to self-employment, while client approval of substitutes points to employment.
  
• Mutuality of obligation – whether the engager is obliged to offer work and the worker obliged to accept; project-based contracts with no ongoing obligation point away from employment.

IR35 and the Construction Industry Scheme (CIS)

Structural engineering work often falls under the Construction Industry Scheme (CIS). However, IR35 takes precedence. If IR35 applies, payments are taxed through PAYE, not CIS. Only when outside IR35 do CIS rules govern tax deductions.

What is the Difference Between IR35 and CIS?

Both IR35 and CIS apply to contractors in structural engineering, but they have different roles. So, what is the difference between IR35 and CIS? In simple terms:

IR35 (Off-Payroll Working Rules):

• Identifies whether a contractor should be treated as employed for tax purposes.
• Applies across industries.
• If inside IR35, PAYE applies to payments.

CIS (Construction Industry Scheme):

• Specific to construction work in the UK.
• Governs how tax is deducted from subcontractor payments.
• Does not assess employment status.

Interaction:

• IR35 takes priority. If a contract is inside IR35, PAYE applies, not CIS.
• CIS applies only when a contract is outside IR35.

Practical Compliance Tips for Structural Engineering Firms

• Use HMRC’s CEST tool for every engagement.
  
• Take reasonable care with contract drafting and record-keeping.
  
• Manage supply chains and ensure agencies handle SDS documents properly.
  
• Allow contractors autonomy in working practices.
  
• Include genuine substitution clauses.
  
• Use project-based contracts specifying deliverables.
  
• Encourage contractors to maintain a visible business presence.
  

Latest Updates and What to Expect

HMRC updated its off-payroll guidance in May 2025. The core rules remain unchanged since April 2021. Consultations are underway on size threshold increases from April 2026, but no official changes have been confirmed. Companies should continue applying current thresholds and monitor future HMRC announcements.

How Apex Accountants Support IR35 Compliance For Structural Engineering Contractors

Structural engineering firms face unique challenges when applying off-payroll working rules. Apex Accountants provide hands-on support through:

• Contract reviews – checking agreements to identify risks of being inside IR35.
  
• Status Determination Statements (SDS) – preparing clear, compliant SDS documents for contractors and agencies.
  
• Working practice assessments – aligning day-to-day operations with HMRC’s control, substitution, and mutuality tests.
  
• CIS and IR35 interaction – advising when IR35 overrides CIS and ensuring correct PAYE operation.
  
• Dispute management – helping firms respond to challenges against SDS decisions within the required timeframe.
  
• Training and guidance – equipping HR, finance, and project managers with practical knowledge to handle IR35 confidently.
  
• Ongoing compliance monitoring – keeping firms updated with HMRC guidance and any legislative changes.

Conclusion

IR35 compliance is a key responsibility for structural engineering companies engaging contractors. The off-payroll working rules require careful contract assessments, accurate Status Determination Statements, and correct PAYE operation where engagements fall inside IR35.

By understanding HMRC’s tests of control, substitution, and mutuality of obligation, firms can reduce risk and structure contracts that genuinely sit outside the rules. It is also important to recognise that the Construction Industry Scheme does not override IR35, and PAYE must be applied where required.

At Apex Accountants, we specialise in supporting structural engineering firms with IR35 compliance. From reviewing contracts and preparing SDS documents to advising on HMRC tests and CIS interaction, our team ensures you stay fully compliant while keeping projects on track.

Contact us today to discuss tailored IR35 guidance for your business and safeguard your operations against unnecessary tax risks.