Fractional CTO

Is a fractional CTO inside or outside IR35?

Last updated 7 October 2026

This comes up at the point of signing, usually from a finance director rather than a founder, and the answer for most startups is less complicated than the question implies.

The short version: it is probably not your problem

The off-payroll working rules put the burden of deciding a contractor's employment status on the client. But they apply only to clients in the public sector or to medium and large private-sector clients. If your company is small, the rules do not apply to you, and the determination goes back where it was before 2021 — with the contractor and their own limited company.

Almost every company that hires a fractional CTO is small by this test. If you are a startup with a dozen people and a Series A, you are not close to the thresholds.

You are medium or large only if you exceed at least two of those, and only if you do so for two consecutive financial years. A newly incorporated company is small in its first financial year.

A wrinkle worth knowing, because almost nobody mentions it

The thresholds went up on 6 April 2025, but the two-consecutive-years test means the increase does not let a mid-sized company out of the off-payroll rules immediately. On HMRC's reading the earliest tax year in which a company newly reclassified as small actually falls outside the rules is 2027–28.

And a second, more awkward one: when I checked HMRC's own Employment Status Manual at ESM10006 on 7 October 2026, it still stated the old £10.2m and £5.1m figures. I am not going to guess at why. It is a reason to take this to an accountant rather than rely on any single page, this one included.

If you are a medium or large client

Then you must make a status determination, document it, and give the contractor a Status Determination Statement with reasons. Three things decide the answer, and a fractional CTO engagement tends to sit comfortably on the right side of all three:

• Control. You agree an outcome; the contractor decides how and when the work is done. A fractional CTO who is told which hours to work and reports through a line manager looks a great deal like an employee.
• Mutuality of obligation. There is no expectation that you will keep providing work or that they will keep accepting it. A rolling retainer with a defined scope and a notice period is fine; an open-ended arrangement that looks like a salary in instalments is not.
• Substitution. A genuine right to send a suitably qualified substitute, not one that is fictional in practice. This is the weakest of the three for a fractional executive, for an obvious reason: you are buying a specific person's judgement. It is rarely the deciding factor on its own.

What the engagement should look like on paper

Several concurrent clients. A statement of work describing deliverables rather than hours. A fixed monthly fee invoiced from the contractor's own company, which is VAT-registered and carries its own insurance and equipment. No seat on your org chart, no line manager, no staff handbook, no company laptop. Not on the internal appraisal cycle.

None of that is contrivance. It is what the arrangement genuinely is when it is working properly — and it is the reason the commercial form is a monthly fee rather than an hourly rate.

Why this question is worth asking at all

Because getting it wrong is expensive, and the money lands on whoever carried the responsibility. Where the rules apply, unpaid income tax and National Insurance are recovered through the supply chain, and a client that did not take reasonable care over the determination can end up holding it. Where the client is small, that exposure sits with the contractor company instead — which is exactly why a contractor who shrugs at this question should worry you more than one who has an answer ready.

What this page is not: tax advice. Status turns on the facts of the particular engagement, HMRC's guidance moves, and the figures above are a snapshot of 7 October 2026. Put the contract in front of your accountant before you sign it.

Sources. Thresholds and the two-consecutive-years test: HMRC Employment Status Manual ESM10006, retrieved 7 October 2026 — which, as noted above, still showed the pre-April-2025 figures on that date. The uprated Companies Act thresholds and the 2027–28 timing are reported by IPSE and ContractorUK, both citing HMRC guidance of 8 April 2025. Where the two disagree with HMRC's manual I have said so rather than picked one. Nothing here is tax or legal advice.