IR35 Explained: How to Determine Your Status and Protect Your Contract

IR35 is the piece of tax legislation that determines whether a contractor operating through a limited company is genuinely self-employed or is, in substance, an employee of the client. Get it wrong and you owe PAYE tax and National Insurance on all income from that engagement, often with interest and penalties on top.

The rules have changed significantly since 2017. Understanding them is now non-negotiable for any UK contractor.

Use the IR35 Assessment Tool to get an AI-powered indicative risk score based on your specific contract arrangement.

What IR35 Actually Tests

IR35 does not ask whether you have a limited company. It asks: if all contractual and working arrangements were exactly the same, but there was no intermediary (no limited company), would you be an employee of the client?

HMRC looks at the substance of the engagement, not just the paperwork. A contract can say "not an employment" and still be caught by IR35 if the working practices tell a different story.

The tests come from employment law case history, particularly:

Hall v Lorimer [1994]
Market Investigations Ltd v Minister of Social Security [1969]

There is no single test. HMRC weighs all factors together.

The Key Status Tests

1. Substitution

Can you send someone else to do the work in your place, without the client's approval?

A genuine right of substitution is one of the strongest indicators of contractor status. If the client can refuse a substitute, or if substitution is practically impossible (client requires your specific personal skills and there is no real right in the contract), this points toward employment.

Important nuance: the right needs to be genuine. If your contract says you can substitute but in practice you never would (client-facing, personal relationships), HMRC may look beyond the contract wording to actual practice.

2. Control

Does the client control how you work? Specifically:

How the work is done (methods, tools, processes)
When the work is done (fixed hours, required location)
What work is done beyond what the contract specifies

Employees are told how to do their job. Contractors decide their own methods and are assessed on deliverables, not process.

Control is the most commonly litigated factor. "Working from client premises" alone is not sufficient for inside IR35, but combined with fixed hours and dictated methods, it becomes significant.

3. Mutuality of Obligation

Is the client obliged to offer you work, and are you obliged to accept it?

Employment contracts carry inherent mutuality: the employer agrees to provide work and pay, the employee agrees to work. Genuine contracts for services (contractor engagements) should not carry this obligation. Each project is a separate agreement.

Mutuality of obligation is notoriously difficult to negate in long-running engagements. If you have worked for the same client for three years with continuous rolling renewals, HMRC will scrutinise the MOO question closely.

4. Financial Risk

Do you bear genuine financial risk from the engagement?

A contractor bears financial risk if:

They fix defects at their own cost
They can lose money on a fixed-price contract
They provide professional indemnity insurance at their own expense
They have invested in equipment, IP, or skills at personal risk

An employee is paid regardless of the outcome. If the engagement goes wrong, it costs you nothing beyond lost income.

5. Part and Parcel of the Organisation

Are you treated as a member of the client's organisation?

Warning signs include: appearing on the client's internal directory, having a company email address, attending internal-only meetings unrelated to your project, being listed on the org chart, receiving company perks (gym membership, subsidised canteen, etc.).

Contractors should be clearly distinct from employees. This is about perception and working practice, not contract wording.

6. Equipment

Who provides the tools you need to do the work?

Contractors typically use their own equipment. If the client provides your primary working tools (laptop, specialist software, machinery), this points toward employment, though it is rarely determinative on its own.

Additional Factors

Beyond the six main tests, HMRC and tribunals also consider:

Exclusivity: Can you work for other clients during this engagement? Multiple clients simultaneously is a strong self-employment indicator.

Length of engagement: The longer and more open-ended, the more employment-like.

How you are paid: Day rate invoiced monthly resembles employment. Project-based fees with milestones are more contractor-like.

Integration: Is the project a defined piece of work that will end, or are you filling a permanent role?

Business risk: Do you operate as a genuine business, with your own website, other clients, and marketing?

Who Decides Your IR35 Status?

The rules changed in April 2021 for most engagements.

Public sector: The client has been responsible for IR35 determination since April 2017.

Medium and large private sector: The client is responsible for determining IR35 status since April 2021. They must provide a Status Determination Statement (SDS).

Small private sector clients: The contractor's own company (PSC) is still responsible for self-assessment.

A "small" company meets two of three criteria: turnover under £10.2m, balance sheet under £5.1m, fewer than 50 employees.

If a client makes an incorrect inside determination, the contractor can appeal via the client's disagreement process.

HMRC CEST

HMRC's official Check Employment Status for Tax (CEST) tool is available at gov.uk. HMRC will stand behind the result if you answer accurately and the engagement does not change.

The key word is "accurately." CEST has been criticised for:

Not adequately handling MOO
Producing "unable to determine" results for borderline cases
Requiring careful interpretation of questions

CEST is a useful starting point, not the definitive answer for all cases. For high-value contracts, a tax specialist's opinion carries more weight with HMRC than a CEST result.

The IR35 Assessment Tool provides an AI-powered risk assessment to help you understand which factors are most relevant before you engage a specialist.

How to Protect Your Position

In Your Contract

Your contract should reflect reality, but it should also document genuine contractor protections clearly:

Substitution clause: Include a genuine (not hypothetical) right to substitute. Name specific conditions. Do not make it conditional on client approval only.
No supervision clause: The client engages you for the outcome, not to supervise your methods.
No MOO clause: State that neither party is obliged to offer or accept further work beyond the current statement of work.
Termination: The contract should allow either party to terminate on notice without cause, consistent with a services engagement.

The Contract Clause Generator can help you generate specific clauses for your contract.

In Your Working Practices

Contracts alone are not enough. HMRC increasingly looks at the "whole picture." Make sure:

You work for multiple clients (or at least could)
You set your own hours and methods wherever possible
You invoice for deliverables, not time
You do not appear on the client's internal systems as a quasi-employee
You carry and pay for your own professional indemnity insurance
You use your own equipment where practical

Get a Contract Review

For contracts worth more than £50,000/year, a professional IR35 contract review by a specialist firm (QDOS, Kingsbridge, etc.) costs around £100-£200 and provides documented evidence of your status assessment. This is worthwhile.

Inside IR35: The Tax Cost

If your engagement is inside IR35, you must calculate a "deemed salary" and pay PAYE income tax and employee National Insurance on it, minus a 5% allowance for company running costs (or the actual costs for some schemes).

For 2024/25, if your deemed salary is £80,000:

Income tax: approximately £19,432
Employee NI: approximately £3,546
Total employment taxes: approximately £22,978

Compare this with the same income taken as salary + dividends outside IR35, where you might pay significantly less due to the lower dividend tax rates and NI efficiency.

The financial cost of being inside IR35 for a higher-rate contractor can easily reach £10,000-£15,000 per year or more.

Summary

IR35 is complex but manageable. The key principles:

IR35 tests substance, not structure
No single factor is conclusive; HMRC weighs all of them
Substitution, control, and MOO carry the most weight in most cases
Working practices must match your contract
For medium and large clients, they determine status from April 2021
Use HMRC CEST and/or a specialist review for any significant contract
Good contracts and clear working practices are your best protection

Start with the IR35 Assessment Tool to understand your current risk profile. Then use the Contract Clause Generator to strengthen specific areas.

This guide is for general information only. IR35 is complex and fact-specific. Consult a qualified tax adviser or IR35 specialist for personalised advice on specific contracts.