What Has Changed with CEST and IR35 in 2026
Two separate changes have landed close together, and both affect how agencies manage contractor compliance. The first is the HMRC CEST tool update in April 2025 — the most significant overhaul since 2019. The second is the increase in the IR35 small company threshold from 6 April 2026, which has shifted the IR35 compliance burden back to contractors for a substantial number of engagements.
Neither change requires agencies to tear up their existing compliance processes, but both create specific review points. If you use contractors regularly — whether as a direct end client or as an agency in the supply chain — you need to understand what each change means for your obligations.
For a grounding in the IR35 rules themselves, our IR35 guide for agency owners covers the off-payroll working framework in full.
HMRC CEST Tool 2026: What the April 2025 Update Changed
HMRC updated the Check Employment Status for Tax (CEST) tool in April 2025 — the first substantive change since 2019. The update addressed longstanding criticism from IR35 specialists and incorporated the impact of key tribunal decisions, including the Supreme Court ruling in PGMOL.
Here is what changed:
CEST April 2025 update: key changes at a glance
- Contract prerequisite: CEST now asks upfront whether a contract is in place. Without a contract, the tool cannot proceed — removing a significant gap in the previous version.
- Mutuality of Obligation section: A new dedicated MOO section asks whether there is an ongoing obligation to offer or accept further work beyond the initial engagement. This better reflects current case law.
- Substitution tightened: Guidance now requires the right to substitute to be unrestricted and genuinely exercisable. Recommending a replacement, or needing client approval, is unlikely to meet the threshold.
- Financial risk refined: Questions now focus on meaningful, unreimbursed commercial exposure rather than incidental costs — asking directly whether the worker must fund costs before being paid.
- Decision matrix published: HMRC published its decision logic as a spreadsheet showing 72 possible outcome routes — 34 lead to "unable to determine", 33 to "inside IR35", and 5 to "outside IR35".
Crucially, HMRC confirmed that the underlying decision-making logic was not changed. The existing question weighting and outcome logic remain the same as before. This means that CEST determinations you ran before April 2025 are still valid, provided the working arrangements described have not materially changed since the original assessment.
You can run CEST assessments on GOV.UK Check Employment Status for Tax. HMRC will stand by a result — whether inside IR35, outside IR35, or unable to determine — provided the information entered is accurate and reflects actual working arrangements.
IR35 Small Company Threshold 2026: Is Your Client Now Exempt?
The second significant change took effect from 6 April 2026. The Companies Act thresholds used to determine whether a business qualifies as "small" for IR35 off-payroll working purposes were raised in line with the government's broader threshold reforms.
The new small company criteria are: annual turnover of no more than £15 million (previously £10.2 million), balance sheet total of no more than £7.5 million (previously £5.1 million), and no more than 50 employees. A company is classified as small if it meets at least two of the three criteria.
HMRC estimates approximately 14,000 companies are reclassified as small as a result. You can verify the current thresholds on GOV.UK off-payroll working guidance.
Important: the size test uses the previous year's accounts
The small company test for IR35 applies by reference to the end client's previous financial year. This means that even though the new thresholds are in force from 6 April 2026, most companies will not see the practical effect in their contractor relationships until their accounting year ending in 2025/26 is confirmed and the test applied for the 2027/28 tax year. If a client's 2024/25 accounts showed turnover between £10.2m and £15m, they may qualify as small from April 2026 — but verify using the prior year accounts, not the current year.
Small companies are exempt from the off-payroll working rules under Chapter 10 of ITEPA 2003. Where a client is classified as small, the IR35 determination responsibility reverts to the contractor's own PSC under the original Chapter 8 rules. The end client does not need to issue a Status Determination Statement, and the agency does not need to operate PAYE under those rules for that engagement.
What the Threshold Change Means for Agencies in the Supply Chain
Even when an end client becomes small and is no longer required to issue an SDS, agencies in the supply chain need to understand the practical consequences carefully.
Under the off-payroll working rules, the fee payer — typically the agency paying the contractor's limited company — is responsible for operating PAYE and accounting for employer National Insurance if an engagement is determined to be inside IR35. When a client crosses from medium to small, that PAYE obligation shifts: the contractor becomes responsible under Chapter 8, not the agency under Chapter 10.
In practice, this means:
- Review your current contractor supply chain. For any end client now meeting the small company criteria, confirm whether Chapter 10 or Chapter 8 applies to each engagement.
- If the client was medium and issuing SDSs but is now small, the contractor takes over the IR35 assessment. Update your payroll process so PAYE deductions are no longer applied under Chapter 10 for those contractors.
- Keep records. Even if a client is now small, document that you checked their threshold status and when. HMRC enquiry windows are long, and demonstrating reasonable care matters.
There is a separate development to be aware of: from 6 April 2026, new joint and several liability rules apply to umbrella company arrangements. If an umbrella company in your supply chain fails to operate PAYE correctly, HMRC can recover unpaid tax from the agency or the end client. This is distinct from the IR35 threshold changes but compounds the compliance risk for agencies using umbrella payroll solutions for contractors.
Do You Need to Re-Run Your CEST Assessments?
This is the practical question most agency owners are asking. The short answer is: not automatically, but in several situations you should.
HMRC has been clear that the April 2025 CEST update did not change the tool's underlying logic. A previous determination remains valid as long as:
- The information entered into CEST was accurate at the time
- The actual working arrangements — control, substitution, financial risk, MOO — have not materially changed since the assessment
- The contract that governs the engagement has not been renewed on different terms
You should re-run CEST in these situations:
- The contractor's engagement has been renewed or extended under new terms since the last determination
- The actual day-to-day working arrangements have drifted from what the contract says — HMRC assesses the reality of the relationship, not just the written terms
- The end client has changed IR35 classification (e.g. moved from medium to small following the April 2026 threshold change), triggering a different rule set for future engagements
- A previous CEST result was "unable to determine" and you never completed a separate employment status assessment
One practical change the new tool brings is the contract prerequisite question. If you previously ran CEST without a formal written contract in place, that result is less defensible. For any active contractor engagement without a current written contract, address the contract first, then re-run.
Our guide to contractor versus employee costs for UK agencies is useful context when reviewing your contractor mix.
When CEST Returns "Unable to Determine"
The decision matrix HMRC published alongside the 2025 update reveals that 34 of 72 possible outcome routes lead to an "unable to determine" result. That is nearly half. If you have used CEST and received this outcome, it does not mean the engagement is inside IR35 — it means the tool could not reach a conclusion.
HMRC will not stand by an "unable to determine" result. It is not a determination and does not provide any protection against an enquiry. If you operate as an end client and your CEST assessment returns "unable to determine", you are still required under the off-payroll working rules to exercise reasonable care in reaching a determination. An "unable to determine" CEST result paired with a lack of any further analysis is unlikely to constitute reasonable care.
The routes most likely to produce "unable to determine" are those where mutuality of obligation is unclear, substitution rights are partially restricted, and the level of control is mixed. These are also the fact patterns that commonly arise in agency-contractor relationships — particularly in creative, marketing, and digital agencies where contractors work on long-running retainer-like arrangements.
For borderline cases, document your reasoning. Note the specific factors that point toward outside IR35, the factors that point the other way, and how you weighted them against the relevant IR35 case law. This written record is what demonstrates reasonable care during an HMRC enquiry.
Practical Checklist: CEST and IR35 in 2026
To bring your IR35 compliance in line with the April 2025 CEST changes and April 2026 threshold changes:
- Audit your end clients' size: Check the prior year accounts of all clients for whom you are placing contractors. Identify which have crossed the new £15m / £7.5m threshold and are now classified as small.
- Review your SDS process: For clients now classified as small, stop issuing or expecting SDSs. Update your payroll process to remove Chapter 10 PAYE deductions for those engagements.
- Re-run CEST where necessary: Flag any assessments where the working arrangements have changed, contracts have been renewed, or a previous result was "unable to determine".
- Check your umbrella supply chain: Confirm that any umbrella companies in your supply chain are compliant under the new JSL rules — ask for evidence of HMRC scheme reference numbers and PAYE compliance.
- Document everything: Whether the result is inside, outside, or unable to determine, keep a written record of how you reached it and when. Use the CEST reference number where one is generated.
For broader tax planning across your agency, our annual tax review checklist for limited company directors covers the full year-end compliance picture.
How Alto Accounting Can Help
IR35 compliance for agencies is genuinely complex. You may be acting as an end client for some contractor relationships and as a fee payer in others, and the rules differ. The April 2026 threshold changes mean some of your existing processes may now be wrong — either over-applying PAYE where a client is now small, or missing a compliance point where they are not.
As an ACCA registered practice (reg. 2000003070) specialising in UK agencies, we help agency owners review their contractor engagement frameworks, run CEST assessments accurately, document reasonable care positions, and build IR35 compliance that holds up to scrutiny. We also cover the interaction with the IR35 small company checker tool available on the HMRC CEST tool page.
If you want a second pair of eyes on your current IR35 position, book a free consultation. We can usually give you a clear picture of where you stand within a single conversation.
Frequently Asked Questions
Do I need to re-run my CEST assessments after the 2025 tool update?
HMRC confirmed that the underlying decision-making logic in CEST did not change in the April 2025 update. If you ran a CEST determination previously and the working arrangements have not changed, you do not need to re-run it. HMRC will stand by existing results, provided the information entered was accurate and the working arrangements remain the same. However, if there has been any material change to the contract terms or actual day-to-day working practices since the original determination, run CEST again using the updated tool.
What is the IR35 small company threshold in 2026?
From 6 April 2026, a company is classified as small for IR35 purposes if it meets at least two of: annual turnover not more than £15 million, balance sheet total not more than £7.5 million, and no more than 50 employees. The threshold was previously £10.2 million turnover and £5.1 million balance sheet. Small companies are exempt from the off-payroll working rules. The test uses the company's previous financial year accounts. You can check the current thresholds on GOV.UK off-payroll working.
As an agency, am I responsible for IR35 status determination?
It depends on the size of the end client and your position in the supply chain. If the end client is medium or large, the off-payroll working rules apply. The end client issues the Status Determination Statement, but the agency — as fee payer — operates PAYE and pays employer National Insurance if the engagement is inside IR35. If the end client is now classified as small following the April 2026 threshold changes, the IR35 responsibility shifts back to the contractor's PSC, and no SDS is required from the client or agency.
What does "unable to determine" mean on CEST?
When CEST returns "unable to determine", the answers given do not clearly resolve to either inside or outside IR35 under HMRC's decision logic. HMRC's published decision matrix shows 34 out of 72 possible outcome routes lead to this result. An "unable to determine" outcome is not a determination, and HMRC will not stand by it. You must carry out a separate employment status assessment, usually with professional advice, and document your reasoning. Operating as though a contractor is outside IR35 on the basis of an "unable to determine" result alone does not demonstrate reasonable care.
What changed in the CEST tool in 2025?
HMRC updated CEST in April 2025 with: a new prerequisite question requiring a contract to be in place; a dedicated Mutuality of Obligation section (prompted by the Supreme Court PGMOL decision); tightened substitution guidance requiring the right to be unrestricted and genuinely exercisable; refined financial risk questions; and publication of the decision matrix. The underlying decision logic was not changed.
Is CEST reliable enough to use without professional advice?
CEST is a useful starting point and HMRC will stand by a clear result if accurate information is entered. However, the tool does not test every aspect of employment status law, and nearly half of all outcome paths lead to "unable to determine." For straightforward engagements, CEST may be sufficient. For complex or borderline cases — where mutuality of obligation is unclear or the substitution right is partially restricted — professional advice alongside CEST is advisable. The consequences of an incorrect inside-IR35 determination can include substantial PAYE and National Insurance liabilities going back years.