What IR35 actually tests
IR35 (formally the off-payroll working rules) asks a single question: if you stripped out your limited company or intermediary, would the relationship between you and the end client look like employment? If yes, you're “inside IR35” and taxed as an employee. If no, you're “outside” and taxed as a genuinely independent business.
The rules have been with us since 2000 but changed significantly for the private sector in April 2021: for engagements with medium or large clients, the end client now makes the status determination and passes it to you via a Status Determination Statement. For engagements with small-company clients, you still self-determine through your own Ltd.
The six factors this assessment uses
- Control — who decides how, when and where the work is done? A client that directs your day-to-day looks like an employer.
- Right of substitution — can you send a qualified substitute in your place? A genuine, unfettered right (exercised or at least credible) is a strong outside-IR35 indicator.
- Mutuality of obligation — is the client obliged to offer work and are you obliged to accept? Project-based contracts with defined deliverables suggest no MOO; ongoing rolling arrangements suggest there is.
- Financial risk — do you bear real risk — fixed-price work, potential for loss, own investment in tools and training? Employees don't; contractors should.
- Part and parcel — are you treated like an employee in the organisation (ID badge, staff directory, line-managed, attending social events)? Kept clearly separate points outside; fully integrated points inside.
- Equipment — do you provide your own equipment, or does the client provide everything? Bringing your own laptop, tools and software argues for independent business.
What the courts have decided
UK employment-status case law goes back to Ready Mixed Concrete v Minister of Pensions (1968) — still the foundational authority. The three-part test established there: (1) personal service obligation, (2) sufficient mutual obligation, and (3) other factors consistent with employment rather than self-employment. Subsequent cases have refined the weighting but not the framework.
Notable recent cases for IR35: Atholl House Productions v HMRC (2022) confirmed that even a broadcaster with genuine other business interests could be inside IR35 on a specific engagement. PGMOL v HMRC (2024) went to the Supreme Court on the mutuality-of-obligation question for football referees — the court found that the absence of an obligation to offer and accept work between matches did not prevent employment status during individual match engagements.
A contractor with genuine substitution rights, clear project-based deliverables, fixed-price work, own equipment and no integration into the client’s staff structure has a strong outside-IR35 position. The same contractor working a daily rate for three years, using the client’s laptop, reporting to a client manager at daily standups, is almost certainly inside — regardless of what their contract with the agency says.— GoForma technical team, 2025/26 IR35 modelling
Who decides your IR35 status?
- Large or medium private-sector client: the end client decides and issues a Status Determination Statement (SDS). You have a right of appeal to the client within 45 days. If the client determines inside, the fee-payer (usually the agency) operates PAYE.
- Public-sector client: same as above, but rules in place since April 2017.
- Small private-sector client: you self-determine through your Ltd. Small is defined by the Companies Act 2006: less than £10.2m turnover AND less than 50 employees AND less than £5.1m balance sheet total. Two of three must be under the thresholds.
What about HMRC's CEST tool?
HMRC provides the Check Employment Status for Tax (CEST) tool as the official self-service status assessment. If used honestly, HMRC says it will stand by the result — but CEST has been criticised (including in the Public Accounts Committee) for insufficient weighting of mutuality of obligation, leaving some clearly-outside engagements incorrectly categorised as inside and vice versa. Use CEST, but don’t rely on it alone for high-stakes engagements.
If your engagement is borderline
- Strengthen the weak factors. Push for a clear substitution clause that matches practice. Renegotiate scope to be project-based rather than time-based. Ask to be excluded from staff events and internal communications.
- Get a contract review. A specialist IR35 review includes both the contract wording and an interview about actual working practices, producing a defensible opinion.
- Consider IR35 insurance. Tax investigation insurance and specialist IR35 cover can fund defence if HMRC challenges your status — worth it for repeat long-term engagements.
- Keep evidence. Screenshots of approval chains, emails showing substitution being offered, invoices against agreed deliverables rather than timesheets — all of this helps at enquiry stage.