TL;DR

Chapter 10 refers to the off-payroll working rules that apply to the public sector in the UK, introduced in April 2017 under the Finance Act 2017. It places the responsibility for determining IR35 status on the public sector authority engaging the worker, rather than the worker's own limited company. Chapter 10 predates and served as the model for Chapter 8, which extended similar rules to medium and large private sector firms from April 2021.

What Chapter 10 Covers

Chapter 10 changed who is responsible for making IR35 determinations when a contractor works through their [personal service company](/glossary/personal-service-company) (PSC) for a public sector client. Before 2017, IR35 had been on the statute books since 2000, but enforcement was weak because the contractor's PSC was responsible for self-assessing whether IR35 applied. Most contractors assessed themselves as outside IR35, whether correctly or not, and HMRC lacked the resources to challenge every determination.

Chapter 10 shifted that responsibility. Under these rules, the public sector authority (or the agency in the supply chain sitting closest to the worker) must determine whether the engagement would be one of employment if the PSC were removed from the equation. If the answer is yes, the entity paying the contractor's PSC must deduct income tax and National Insurance Contributions at source, as if the worker were an employee.

Public sector bodies covered include central government departments, NHS trusts, local authorities, universities, and other bodies defined as public authorities under the Freedom of Information Act 2000. Private companies working under public sector contracts are not automatically covered — the rules apply at the level of the engager, not the nature of the work.

The test for deemed employment under Chapter 10 uses the same criteria as the general IR35 test: control, substitution, and mutuality of obligation. Can the client direct how and when the worker does their work? Is the worker required to perform the services personally, or can they send a substitute? Does either party have an obligation to offer or accept further work? A contractor who scores highly on control, has no genuine substitution right, and works exclusively for one client is very likely to be caught by Chapter 10.

Practical Implications for Recruitment

Recruiters placing contractors into public sector roles are squarely in the Chapter 10 compliance chain. The agency supplying a PSC contractor to a public sector client is typically the "fee-payer" — the entity that pays the contractor's PSC. As fee-payer, the agency is responsible for operating PAYE if the public authority has issued a Status Determination Statement (SDS) that places the contractor inside IR35.

The SDS is a formal document the public sector client must produce stating whether IR35 applies and why. If the client issues an SDS placing the contractor inside IR35, the agency must deduct income tax and NIC from the contractor's payments before remitting the net amount to the PSC. Getting this wrong exposes the agency to the underpaid tax liability.

Contractors affected by Chapter 10 inside determinations typically face two choices: accept a reduced net rate to account for the tax taken at source, or move to an umbrella company that handles PAYE employment. Many contractors shifted their business away from public sector work when Chapter 10 came in, reducing the talent pool available to public sector clients for specialist contract roles — an unintended consequence that is well documented.

In Practice

A government technology programme engages 15 software contractors through a staffing agency. The programme's procurement team issues SDSs for all 15 roles; 12 are assessed as inside IR35. The staffing agency, as fee-payer, must now operate PAYE on those 12 contracts. The agency creates payroll records, deducts income tax at the marginal rate and employee NIC, and remits these to HMRC. The employers' NIC on top of the gross fees is also due from the fee-payer, which the agency factors into the rates it charges the programme. Two of the 12 contractors decline the inside determination and challenge it via the formal status disagreement process. The programme reviews both cases, upholds one determination and revises the other, and issues corrected SDSs within the statutory 45-day window.

Key Facts