How Does IR35 Apply to a Locum Solicitor in 2025/26?

What Is IR35 and Why Does It Matter for Locum Solicitors?

IR35, also known as the off-payroll working rules, determines whether a locum solicitor who provides services through a personal service company (PSC) should be treated as an employee for tax purposes. If the rules apply, the locum solicitor pays income tax and National Insurance Contributions (NIC) broadly as if they were a direct employee of the engaging firm, rather than as a self-employed contractor through their PSC.

For the 2025/26 tax year, the rules are unchanged from the 2021 reform that extended them to medium and large organisations in the private sector. The key change for locum solicitors is that the engaging firm (the client law firm) is now responsible for determining the locum's employment status and, if inside IR35, for deducting PAYE and NIC from fees paid to the locum's PSC.

Getting the IR35 determination wrong carries significant financial risk. HMRC can pursue unpaid tax, NIC and interest, plus penalties of up to 100% of the tax due in deliberate non-compliance cases. Both the engaging firm and the locum solicitor can be liable, depending on who made the incorrect determination.

Who Is the "Engaging Firm" for a Locum Solicitor?

The engaging firm is the law firm that contracts for the locum solicitor's services. Under the off-payroll rules, the engaging firm is responsible for determining the locum's employment status if the firm is medium or large under the Companies Act 2006 definition. A firm is medium or large if it meets two of three conditions: turnover above £10.2 million, balance sheet total above £5.1 million, or more than 50 employees.

Most multi-partner law firms and LLPs will meet this threshold. Sole practitioners and small high-street firms with fewer than 50 employees and turnover below £10.2 million may be small. If the engaging firm is small, the locum solicitor's PSC remains responsible for determining its own IR35 status, as was the case before April 2021.

The SDS (Status Determination Statement) must be provided by the engaging firm to the locum solicitor's PSC and to any agency involved in the chain. The SDS must set out the firm's conclusion on whether the engagement is inside or outside IR35 and the reasons for that conclusion.

Inside IR35 vs Outside IR35: What Determines the Status?

HMRC uses a set of employment status tests to decide whether a locum solicitor is inside or outside IR35. The three core tests are substitution, control and mutuality of obligation.

• Substitution. Can the locum solicitor send a replacement if they are unavailable? If the contract allows a genuine, unfettered right of substitution and the engaging firm cannot unreasonably refuse, this points outside IR35. Many locum solicitor contracts prohibit substitution entirely, which points inside IR35.
• Control. Does the engaging firm control when, where and how the locum solicitor works? A locum solicitor who sets their own hours, works from home part of the week and decides how to handle their caseload is more likely to be outside IR35. A locum who must attend the office 9-5, follow firm procedures and take instructions from a supervising partner is inside IR35.
• Mutuality of Obligation (MOO). Is the engaging firm obliged to offer work and the locum obliged to accept it? A fixed-term contract for a specific project with no ongoing obligation after completion points outside IR35. A rolling contract where the firm expects the locum to cover all absences and the locum expects regular work points inside IR35.

Other factors include financial risk (does the locum bear any financial risk, such as rectifying errors at their own cost?), equipment provision (does the locum provide their own laptop and software?) and integration (is the locum treated like an employee, with a firm email address, business cards and attendance at team meetings?).

Practical Example: A Locum Solicitor in a Conveyancing Department

Consider a locum solicitor, Sarah, who works through her PSC, Sarah Legal Services Ltd. She contracts with a medium-sized law firm to cover a conveyancing caseload for six months. The contract states Sarah must attend the office 9am-5pm, Monday to Friday. She uses the firm's case management system, has a firm email address and attends weekly team meetings. The contract prohibits substitution. Sarah's work is supervised by a salaried partner who reviews her files.

In this scenario, the engaging firm's SDS should conclude that Sarah is inside IR35. The firm must then deduct PAYE and employee NIC from the fees paid to Sarah's PSC, and pay employer NIC and the Apprenticeship Levy if applicable. Sarah's PSC receives the net amount, which is then subject to corporation tax on any retained profits, but the PAYE/NIC deductions mean the PSC's profit is significantly reduced.

If instead Sarah worked from home three days a week, set her own hours, provided her own laptop and software, and could send a substitute if she was unwell, the SDS would likely conclude outside IR35. Sarah's PSC would then invoice the firm net of VAT (if registered), and Sarah would extract profits via dividends and salary, paying tax at her personal marginal rates.

What Happens If the Engaging Firm Gets the SDS Wrong?

If HMRC challenges an IR35 determination and finds the locum solicitor was inside IR35 but treated as outside, HMRC can recover unpaid tax and NIC from the engaging firm (if medium or large) or from the locum's PSC (if the engaging firm is small). The engaging firm is liable for the tax and NIC that should have been deducted, plus interest and penalties.

The locum solicitor's PSC may also face a liability if it failed to operate PAYE correctly after receiving a valid SDS that stated the engagement was outside IR35. The PSC should have its own IR35 status review and, if it disagrees with the engaging firm's SDS, should raise the matter in writing and seek professional advice.

HMRC's Check Employment Status for Tax (CEST) tool is often used by engaging firms to support their SDS. However, CEST has limitations, particularly for professional services engagements like locum solicitors where the facts are nuanced. A written contract that accurately reflects the working practices is essential, but HMRC will look at the actual working arrangements, not just the contract terms.

How Should a Locum Solicitor Prepare for IR35 in 2025/26?

If you are a locum solicitor working through a PSC, you should take the following steps:

• Review your contract. Ensure it accurately reflects the working arrangements. If the contract says you can send a substitute but you never do and the firm would refuse, the contract is misleading. HMRC will look at reality, not the paperwork.
• Obtain a Status Determination Statement. Before starting any engagement, ask the engaging firm for a written SDS. If the firm is small and does not provide one, your PSC must carry out its own IR35 assessment using HMRC's Employment Status Manual or a professional adviser.
• Keep records. Save all correspondence about working arrangements, substitution rights and control. If HMRC investigates years later, contemporaneous records are your best defence.
• Consider insurance. IR35 investigation insurance is available through some professional indemnity insurers and specialist providers. It covers the cost of defending an HMRC enquiry.
• Speak to a specialist accountant. A legal-sector-specialist accountant can review your contracts, advise on IR35 status and help structure your PSC's tax affairs efficiently. See our services page for more on how we help locum solicitors.

What About the Locum Solicitor's Own Professional Indemnity Insurance?

A locum solicitor working through a PSC must hold their own professional indemnity insurance (PII) to the SRA's Minimum Terms and Conditions. This is a separate requirement from IR35 status. Even if the locum is inside IR35 and treated as an employee for tax, they remain a separate legal entity for regulatory purposes and must have their own PII cover.

The cost of PII for a locum solicitor is typically higher than for a firm because the locum bears the full risk alone. Premiums are tax-deductible against the PSC's profits. For more on PII tax treatment, see our guide on professional indemnity tax treatment.

What If the Locum Solicitor Operates as a Sole Trader?

If a locum solicitor works as a sole trader rather than through a PSC, IR35 does not apply. The locum is self-employed for tax purposes and reports income on a self-assessment tax return, paying Class 4 NIC and income tax on profits. However, the engaging firm must still assess whether the locum is genuinely self-employed for employment law purposes (employment status, not IR35).

Many locum solicitors prefer the PSC structure because it offers greater control over tax planning (dividends rather than salary) and limited liability. But the IR35 rules make the PSC structure less attractive for engagements that are inside IR35, because the tax treatment is broadly the same as being an employee, with the added complexity of running a company.

If you are a locum solicitor considering whether to use a PSC or operate as a sole trader, read our guide for locum solicitors for a detailed comparison.

What Are the Penalties for Non-Compliance?

HMRC can impose penalties for incorrect IR35 determinations and failure to operate PAYE correctly. The penalty regime is as follows:

• Careless inaccuracy. Up to 30% of the tax underpaid.
• Deliberate inaccuracy. Up to 70% of the tax underpaid.
• Deliberate and concealed inaccuracy. Up to 100% of the tax underpaid.
• Failure to provide a SDS. A fixed penalty of £50 per contractor per month, capped at £500 per contractor.

Interest is charged on unpaid tax from the date it should have been paid. For a locum solicitor engagement lasting 12 months, the tax and NIC underpayment could easily exceed £20,000, making the penalty and interest a significant additional cost.

How Can a Specialist Accountant Help?

IR35 is a complex area of tax law, and the facts of each locum solicitor engagement are unique. A generalist accountant may not understand the specific regulatory context of the legal profession, such as the SRA's rules on supervision, client money and professional conduct that affect how a locum solicitor works.

A legal-sector-specialist accountant can review your contracts, advise on IR35 status, help you structure your PSC's tax affairs and represent you in an HMRC enquiry. We work with locum solicitors across the UK, from high-street conveyancers to City litigation specialists. Contact us to discuss your situation.

For more on the broader tax and regulatory framework for solicitors, see our solicitor guides or book a free firm health check.