IR35 and employment status: PI implications for UK IT consultants and contractors

~5 min read

Reviewed by Matthew Bartlett, Director · Last reviewed 2026-07-06

The off-payroll working rules — commonly referred to as IR35 — are the UK tax framework that determines whether an individual working through an intermediary (typically a personal service company, or PSC) is, for tax purposes, a disguised employee of the end client or a genuine contractor. The framework has been in force since 2000 and was materially extended through the 2017 public sector reform and the 2021 private sector reform. It has particular impact on IT contractors and consultancies because a substantial proportion of UK IT work is delivered through PSC or umbrella arrangements. From a professional indemnity insurance perspective, IR35 does not directly create PI exposure — but employment status determinations, contractor supply arrangements, and the underlying working relationships can interact with PI cover in specific ways that matter at renewal. This entry sets out how.

The IR35 framework in outline

Under the off-payroll working rules, the end client (or, in supply-chain arrangements, an intermediary) is responsible for determining whether an engagement falls "inside IR35" or "outside IR35". Inside means the working relationship has the characteristics of employment, notwithstanding the intermediary structure — the individual is treated as an employee for tax purposes and PAYE/NICs are deducted. Outside means the working relationship is genuinely one of business-to-business contracting, and payments to the intermediary flow gross.

The determination is made against three well-established employment status tests derived from Ready Mixed Concrete v Minister of Pensions and its progeny: personal service (whether the individual must perform the work personally or can substitute), control (whether the end client controls how, when and where the work is done), and mutuality of obligation (whether there is an ongoing obligation to offer and accept work). Supplementary factors — provision of equipment, financial risk, integration, exclusivity — also feed the analysis.

How IR35 relates to PII

PII cover attaches to the contracting party — the entity that provides the professional services to the client. Where an IT consultant operates through a PSC, the PII policy typically sits in the PSC's name and covers the PSC's professional services. Where the consultant is engaged through an umbrella company (a full-employment model), the umbrella typically provides umbrella-level PII cover, though the consultant may also hold personal cover. Where the consultant is a direct employee of an end client, PII is typically the client's problem.

The IR35 determination itself does not change PI exposure. Whether a role is inside or outside IR35 is a tax question, not a professional services question. A negligently delivered piece of consultancy is negligently delivered regardless of the tax classification of the delivering entity.

Where the interaction matters

Three areas where IR35 status affects PI arrangements in practice.

First, PSC PII placement. Where a contractor operates through a PSC, the PSC's PII policy needs to expressly cover the individual's activities. The individual's professional negligence is imputed to the PSC as a matter of company law, and the PSC's policy responds. Policies placed at PSC level are typically at moderate limits (£500,000 to £2 million) reflecting the individual contractor's exposure. Where the contractor moves to larger engagements or takes on delivery leadership, the PSC's limit should be reviewed.

Second, umbrella PII. Where the contractor is engaged through an umbrella company, the umbrella typically holds PII cover for its workers. The specific wording and limits vary between umbrellas — some hold generous cover, others hold minimal. Contractors should confirm the umbrella's PII arrangements at engagement, particularly where the client contract specifies PII cover as a precondition. Where umbrella cover is inadequate, some contractors hold personal PII cover as a backstop, though the interaction between umbrella cover and personal cover can generate coverage disputes.

Third, consultancy sub-contracting. Where an IT consultancy engages contractor sub-consultants through PSCs or umbrellas, the consultancy's own PII cover needs to respond to the sub-consultant's work — the client engaged the consultancy, not the sub-consultant, so any claim from the client sits against the consultancy in the first instance. The consultancy's contractual arrangements with the sub-consultant should provide for recovery, but the primary PI response is to the consultancy.

Status disputes and PI

An IR35 status dispute — where HMRC or an employment tribunal disagrees with the determination made by the end client — is a tax and employment-law matter, not a PI one. PII does not respond to tax liabilities, employment tribunal proceedings, or HMRC settlements. Where the status determination was made negligently by a third-party consultant advising on IR35 compliance (a tax specialist or employment law adviser), the affected client may have a PI claim against that adviser — but that is a PI claim on the adviser's cover, not on the IT contractor's cover.

The 2021 private sector reform

Before April 2021, IR35 status in the private sector was determined by the intermediary itself (the PSC). Since April 2021, the end client (or an agency in the supply chain) is responsible for the determination and, where inside IR35, for the tax deductions. This has moved the compliance burden materially — end clients now carry risk they did not carry before, and many have responded by narrowing their engagement of PSC contractors or requiring inside-IR35 arrangements as standard. For IT contractors, this has meant a shift towards umbrella arrangements or towards inside-IR35 PSC engagements. The PI implications track those changes — umbrella-provided PII becomes more important; PSC-level PII becomes less important for many contractors.

Independent contractor test law

The 2011 Autoclenz v Belcher decision, the 2018 Pimlico Plumbers v Smith decision, and the 2021 Uber v Aslam decision have shaped modern employment status analysis in ways that affect IR35 determinations. Consultancies advising clients on IR35 compliance operate in an area of active case law development, and negligent advice on status determination is itself a PI claim head — for IR35 advisory consultancies specifically. IT contractors who happen to be engaged inside or outside IR35 are affected by these decisions indirectly through their engagements, not directly through their own PI cover.

Practical points for firms

Three practical points recur.

First, IT consultancies engaging contractor sub-consultants should ensure the consultancy's own PII covers the sub-consultant's activities and that contractual recovery provisions are in place.

Second, PSC contractors should size their PSC's PII cover to the engagements they are undertaking — not to a nominal minimum. Higher-value engagements require higher cover.

Third, umbrella contractors should confirm the umbrella's PII wording and limits before engagement, particularly for client contracts specifying PII requirements.

Worked example

Illustrative only. An IT consultancy engaging on a £600,000 12-month enterprise architecture engagement uses three sub-consultants: one through the sub-consultant's PSC (outside IR35 determination by the end client), one through an umbrella (inside IR35), and one as a direct short-term contractor. Consultancy's own PII cover is £5 million; each sub-consultant carries their own cover of varying quality. Broker action: consultancy's PII wording expressly covers work delivered by sub-consultants engaged in support of the primary engagement; contractual recovery provisions in each sub-consultant agreement; documentation of the sub-consultants' PII arrangements filed for the engagement duration.