What is IR35, really?

IR35 (the off-payroll working rules) tests whether the relationship between you and your client looks like genuine self-employment or like disguised employment. If HMRC sees it as the latter, the engagement is "inside IR35" and the tax treatment looks more like employment.

You're outside IR35 when you genuinely run an independent business with multiple clients, control over how you work and the right to send a substitute. You're inside IR35 when the day-to-day arrangement looks like you're effectively an employee using a limited-company wrapper.

The three-pillar status test

HMRC and the courts assess status against three core factors:

  1. Personal service / right of substitution. Can you genuinely send someone else to do the work in your place? A real, unfettered substitution clause is one of the strongest indicators of "outside IR35."
  2. Control. Does the client tell you how to do the work, when to do it and where? Significant control points towards employment.
  3. Mutuality of obligation (MoO). Is the client obliged to offer you work, and are you obliged to accept it? An ongoing obligation looks like employment.

Other factors weigh in: integration into the client's team, who provides the equipment, whether you take financial risk, and how the contract is presented day-to-day.

Who decides your status?

Since the off-payroll reforms, in the public sector and for medium and large private sector clients, the client (or fee-payer) is responsible for determining your status. For genuinely small private sector clients, the contractor's own limited company assesses status under the original IR35 rules.

Either way, the actual working practices matter as much as the contract wording. A well-drafted contract that doesn't match what happens day-to-day won't protect you.

Evidence to keep for every engagement

  • The signed contract, with the IR35 status clause and any substitution clause clearly visible
  • Status Determination Statement (SDS) from the client if applicable
  • Confirmation of working practices from your point of contact
  • Evidence of running your own business: marketing, other clients, your own equipment, your own insurance
  • Records of you turning down extra work, or finishing one engagement and starting another
Get every contract reviewed

IGI clients on our Contractor plan get unlimited IR35 contract reviews. We look at the wording and the working practices and give you a clear status view in writing.

What changes if you're inside?

An inside-IR35 engagement means most of the income is taxed like employment income, with income tax and NI deducted at source by the fee-payer (or by you, depending on the rules that apply). You lose the dividend efficiency, but you can still legitimately claim some allowable expenses (subject to rules) and can pay into a pension via your company.

Inside isn't a disaster — it just means a different financial plan. The disaster is assuming you're outside, being wrong, and discovering it three years later.

Your action plan for each new contract

  1. Read the contract carefully — especially substitution, control and mutuality clauses.
  2. Get the SDS if your client is responsible for determining your status.
  3. Send the contract to your accountant for an IR35 review before you sign.
  4. Document the working arrangements in writing at the start.
  5. File evidence away — you may need it three years from now.
  6. If status changes mid-engagement, get it re-reviewed immediately.

Frequently asked questions

Yes — each engagement is assessed separately. Many contractors have a mix at different times in their career.

HMRC's CEST tool is useful as a sanity check but is not the final word and doesn't cover mutuality of obligation properly. A qualified accountant's review carries more weight.

If HMRC reclassifies an outside engagement as inside, the unpaid tax, NI, interest and potentially penalties become payable. Keep good evidence so a challenge is rare and defendable.