The key factors which determine your IR35 status

A number of key factors are used to establish employment status – whether an individual’s contract work is caught by IR35 or not.

These include the right to substitution, control, mutuality of obligation, and other factors which help establish whether a contractor is ’employed’ or genuinely working for themselves.

Key IR35 factors

• Control – who decides how, when and where the work is done
• Substitution – whether the worker has a genuine right to provide a substitute
• Mutuality of obligation – the obligations which exist between the parties during the engagement

Why was IR35 implemented?

The Intermediaries Legislation (IR35) was implemented in 2000 to clamp down on ‘disguised employment’ via the use of ‘personal service companies’.

A traditional ‘employee’ would leave his/her job one day, only to return to work in the same or a similar role shortly afterwards, but would do so via a limited company structure.

The IR35 rules aim to tax ‘disguised employees’ who enjoy the favourable tax treatment of their own companies but still work in a similar manner to normal employees.

Off-payroll rules were implemented in 2017 (public sector) and 2021 (private sector).

Under these rules, public sector bodies and medium and large private sector clients generally determine IR35 status.

Where the private sector client is small for off-payroll purposes, responsibility normally remains with the contractor’s company under the original IR35 rules.

Where the client makes the decision, it must take reasonable care and issue a Status Determination Statement (SDS), giving both its conclusion and the reasons behind it.

Read more in our guides to reasonable care under the off-payroll rules and HMRC’s CEST tool.

Originally, limited company contractors self-certified their IR35 status.

Find out more in our IR35 timeline (1999-date).

Contract wording and working practices

Importantly, the big picture of how an assignment or contract is carried out in practice is considered.

This means that both the terms of any contracts and an individual’s working practices must demonstrate that the person is in business on his/her own account in order to escape IR35.

There is little point in having a watertight, ‘IR35 free’ contract between a contractor and the agency, even if it mirrors the client-agency contract perfectly, unless the contract terms match the individual’s working practices.

The key IR35 factors in determining employment status

Here are the key factors HMRC considers when determining whether an assignment would be deemed to be caught by IR35.

Personal service, control and mutuality of obligation are central employment status tests, but none can determine the IR35 status of a particular assignment on its own.

In practice, no single factor can determine the IR35 status of a contract. HMRC and the courts look at the overall picture based on all relevant factors.

1. Control & Direction

One of the most important determinants of IR35 status is the extent to which a client controls what work is done, as well as where, when and particularly how an individual performs their work.

Are you under the direct control of your client?

In most cases where professional services are provided, a contractor must demonstrate a degree of autonomy in how they undertake a project.

Employees are typically under the direct supervision and control of their employers; however, the truly self-employed will have more influence over how they complete the work they have been hired to do.

For IT contractors and consultants, the client is likely to provide a fairly detailed specification outlining the tasks it requires the contractor to complete.

Defined deliverables, outcomes or responsibilities can support an independent relationship, particularly where the contractor retains control over how the work is carried out.

For a contractor to successfully demonstrate that they are not under the direct supervision and control of the client, both the written contract and working practices should support genuine autonomy over how the agreed services are performed.

Control – things to look out for

Contractual pointers towards a classic ‘employment scenario’ include:

• Indicating that the contractor will be supervised by a line manager or similar company employee.
• Including work start and end times, and even break times in the contract.
• Including any ‘staff’ perks, including provisions for holidays or sickness.
• Any clauses that specify any rights of control or supervision over the contractor.

It is worth noting that any clauses related to control should be consistent across the contractual chain and with what happens in practice.

Read more in our article on control and direction as an IR35 factor.

2. Personal Service / Substitution

The right to provide a substitute in a contractual agreement has long been deemed an important factor in demonstrating that a contract assignment falls outside the scope of IR35.

An employee provides personal services to an employer (client), whereas a business provides services to a client rather than the exclusive services of an individual.

As a result, many professionally drawn-up ‘IR35 friendly’ contracts will include a substitution clause.

The right of substitution – important points

• The right to supply a substitute must be genuine; otherwise, HMRC may conclude the clause does not reflect the real agreement. A genuine contractual right may still carry considerable weight even if it has never been exercised.
• The client’s actual position also matters: a substitution clause will carry little weight if the client would in reality insist on the named contractor doing the work.
• An ‘unfettered’ right of substitution means a client cannot insist that the original worker personally carry out the work. This is a strong indicator of self-employment, but it is rarely available given the nature of IT contracting.
• Clearly, if a substitute has actually been used during the course of an assignment, this is another strong pointer towards self-employment.
• Your company should always cover any costs associated with providing a substitute worker, should the need ever arise. Your company should also provide any training and make all arrangements for bringing the substitute on site.
• In the real world, end clients will often maintain a right to reject a substitute on reasonable grounds – for example, if the substitute does not have sufficient qualifications or security clearance. This does not necessarily destroy the right of substitution, although the extent of any restriction matters.
• If you do not have a right of substitution in place (i.e. your contract is one that requires personal service), this does not automatically mean that you will be caught by IR35, as many other factors are also taken into account.

Read a legal expert’s opinion on why a right to substitution is so important.

3. Mutuality of Obligation

Mutuality of obligation is one of the more frequently misunderstood areas of employment status.

For any contract to exist, there must be a minimum level of mutual obligation. Broadly, the engager must be obliged to provide work or payment and the worker must be obliged to provide their work or skill.

These basic obligations can exist in both a contract of employment and a contract for services, so their existence alone does not determine IR35 status.

The Supreme Court’s decision in HMRC v Professional Game Match Officials Ltd confirmed that the necessary mutual obligations can exist during an individual engagement once the worker agrees to perform work and the engager agrees to pay for it. There need not be an obligation to offer or accept another contract afterwards.

This means that the absence of guaranteed future work is not, by itself, enough to place an engagement outside IR35.

That does not make project-based working irrelevant. A contractor engaged for clearly defined work, with no obligation to accept additional tasks outside that scope, and who negotiates extensions rather than assuming they will happen may still support the wider picture of an independent business relationship.

Repeated renewals or a long-running relationship may also form part of the overall picture, but neither automatically determines status.

HMRC explains its current approach in Employment Status Manual ESM0543.

Read our guide to IR35 and the Mutuality of Obligation. For a more detailed look at the case law, see mutuality of obligation and IR35 on IR35 Update.

4. Provision of Equipment

Does the individual use equipment provided by the client, or their own?

Providing substantial equipment can support a contractor’s self-employed status, although this factor may carry less weight for IT contractors where clients require them to use their own laptops, networks, or systems for security reasons.

5. Financial Risk

How much financial risk does the individual undertake in their work? If all the risk lies with the client, this may indicate ‘employment’ rather than ‘self-employment’.

Being responsible for correcting defective work at your own cost is one example of genuine business risk.

6. Basis of Payment

The basis on which a contractor is paid may have some influence on IR35 status.

Payment for specific deliverables or completed work may support self-employment, but being paid an hourly or daily rate does not automatically indicate employment. Day-rate billing is commonplace in professional contracting.

7. Part & Parcel

To what extent has the individual become part of the organisation, i.e. do they have access to staff facilities, attend staff meetings, attend staff social events or receive staff benefits?

8. Exclusive Service

Does the individual work exclusively for one client, or are they free to provide services to others?

Having several clients may support the argument that someone is running an independent business, but working on a single substantial contract at any given time does not automatically point towards employment.

9. The intention of the Parties

Even if no formal written contract exists, HMRC would want to determine the true status of the relationship between the parties – employment or self-employment.

The parties’ stated intentions may be relevant, but they cannot override the actual contractual terms and working practices. They are most likely to carry weight where the other status factors leave the position unclear.

10. In Business On Your Own Account

Here are some typical pointers on how to behave and act like a ‘real business’ for IR35 purposes.

These are supporting indicators, not a checklist. Factors such as commercial risk, autonomy and the ability to provide services through others generally carry more weight than having a website, logo or VAT registration.

• Do you have multiple clients? This may support the wider picture of self-employment, although each assignment is judged individually for IR35 purposes.
• Does your company have any income from non-contracting sources (e.g. designing websites in your spare time)?
• Do you have your own business website and company email address?
• Do you have company stationery, letterheads, a logo, and customised invoices?
• Do you use any of your own equipment for contract purposes?
• Is your company registered for Value Added Tax (VAT)?
• Has your company ever employed anyone else or used sub-contractors?
• Do you have business liability and professional indemnity insurance in place?
• Has your company invested in training, or improving its marketability in any other way?
• Does your contracting business ever advertise its services, either on its own website or on freelancer-type portals?
• Do you have a dedicated office space in which you have carried out any contract-related work?
• Do you regularly tender for contract work or apply for contract positions?
• Does your company bear genuine commercial risk, for example by having to correct defective work at its own cost?

These pointers are typical characteristics of a working business and may help demonstrate that you are indeed in business on your own account, rather than working in a manner similar to an ‘employee’. Some, such as a website, VAT registration or company branding, are only supporting evidence rather than significant status factors in their own right.

These factors will be used to paint an overall picture of your employment status, and therefore whether an assignment is caught by IR35 or not.

IR35 factors – final thoughts

• Always consult an IR35 contract review specialist to examine each new contract you take on.
• If you are responsible for determining your own IR35 status (i.e. you work for a small company), consider taking out IR35 insurance in case you are selected for investigation by HMRC. This will cover any professional costs you incur defending yourself.
• Find out what happens if you’re selected for an IR35 enquiry.