Understanding IR35 status
“Inside IR35” means HMRC treats you as an employee for tax purposes, so income tax and National Insurance are deducted from your contract earnings. “Outside IR35” means you’re genuinely self‑employed; you can pay yourself through your company in a tax‑efficient way (salary plus dividends) and pay corporation tax on profits. The challenge is working out which side of the line your contract falls on.
Who decides the status?
Before the April 2021 reforms, contractors largely determined their own IR35 status (with the risk of an HMRC challenge later). Since then, for medium and large private‑sector clients, the end client must assess your status and provide you with a Status Determination Statement (SDS) explaining the decision. In the public sector this client‑led rule has been in place since 2017. If your client is a small private business (meeting two of the Companies Act criteria: turnover ≤ £10.2 m, balance sheet ≤ £5.1 m or ≤ 50 employees) the old rules still apply and you (via your company) remain responsible for assessing and accounting for IR35. Whichever party makes the determination, it’s vital to understand the status factors because your actual working practices ultimately dictate IR35 status – not just what the contract says.
Key factors used to determine IR35 status
HMRC and the courts examine the real working relationship between you and the client. Key factors commonly assessed include:
Control – How much autonomy do you have over what, how, when and where you carry out your work? The more the client dictates your hours, methods and tasks, the more you resemble an employee (inside IR35). Significant autonomy over your schedule and working methods points to outside IR35.
Right of substitution – Can you send someone else to do the work on your behalf, or are you personally required? A genuine substitution clause that could realistically be exercised suggests an outside‑IR35 arrangement. If the client insists on you and only you, it looks more like employment.
Mutuality of obligation (MOO) – This is about ongoing obligations for work and pay. In normal employment there’s a continuous obligation for the employer to provide work (and pay) and for the employee to accept it. For contractors, once a project or task is delivered there shouldn’t be an expectation of further work. If the client must offer you work and you’re expected to take it, that suggests inside IR35. Engagements limited to a specific task or term with no promise of more lean outside.
Financial risk – Do you bear financial risk and responsibility for your work? For instance, if a project overruns, would you need to fix issues in your own time or at your own cost? Genuine businesses sometimes risk losses (e.g. working unpaid to correct defects), whereas employees generally do not. The potential to make a loss or not being paid simply for “turning up” supports a business‑to‑business relationship.
Part and parcel of the organisation – Are you integrated into the client’s company like an employee? Using internal resources, attending staff meetings or social events, appearing on organisation charts or receiving benefits/perks all make you look like part of the company (inside IR35). True contractors remain independent – often working off‑site or with their own equipment and not entitled to employee benefits – which indicates outside IR35.
Exclusive services – Are you free to take on other clients and projects simultaneously? Independent contractors usually market their services to several clients. If your contract or workload prevents you from working elsewhere, it resembles employment. The ability to have concurrent clients supports an outside‑IR35 position.
Provision of equipment – Do you use your own equipment or the client’s? Contractors who supply their own tools, laptop and software appear more like independent businesses. Relying entirely on the client’s equipment is more typical of an employee (though in some industries security requirements mean client equipment is necessary, so this factor is considered alongside others).
No single factor decides IR35 on its own; it’s the overall picture that counts. Essentially, ask yourself: “If it weren’t for the way I’m paid, am I effectively operating as an employee?” If you answer “yes” to most questions pointing to dependence, you’re likely inside IR35. If your working practices show independence, you’re likely outside.
Practical steps to determine your status
If you’re unsure about your status, begin by reviewing both your contract and the actual working practices. HMRC’s online tool CEST (Check Employment Status for Tax) asks a series of questions and gives an indication of inside or outside IR35. Use it cautiously – it’s a useful starting point but not legally binding and has been criticised for its accuracy in complex cases. You may want to obtain a professional contract review from IR35 specialists or insurers. Remember, simply stating “this contract is outside IR35” or tweaking clauses won’t protect you if the reality of the engagement doesn’t match. HMRC can disregard self‑serving contract wording and look at what actually happens day‑to‑day. Ensure your working arrangements (control, substitution, financial risk, etc.) genuinely support an outside‑IR35 position if that’s what you claim.
Under the off‑payroll rules, if a client issues an SDS saying you’re inside IR35 and you disagree, you have the right to challenge it through the client’s status disagreement process. The client must review and respond within 45 days. While they review, the original decision stands, but you can present evidence to argue your case.
Summary
To decide whether you’re inside or outside IR35, evaluate how your contract operates in practice against the factors above. If you’re tightly supervised, cannot substitute, work long‑term solely for the client and receive instructions like an employee, you’re likely inside IR35. If instead you run your contracting business independently – working for multiple clients, using your own methods and equipment and having no obligation for further work – you’re likely outside. Always keep documentation of your working practices (emails granting autonomy, proof of using a substitute, business insurance, etc.) in case you need to defend your status. Armed with this understanding, you can navigate IR35 determinations more confidently.
