How to Determine Whether You Are Inside or Outside IR35

Whether an engagement falls inside or outside IR35 is not a label a contractor chooses, and it is not fixed by the words on the contract alone. It is a question of employment status decided by applying a settled set of tests to the realistic working relationship, the picture of how the work is actually done. The financial consequences are large, which is why it is worth understanding the true take-home gap between inside and outside IR35 before reading how status itself is decided.

This piece sets out the three tests that determine status, who is legally responsible for making the determination under the off-payroll working rules, how that responsibility differs between the public and private sectors, and the small company exemption that hands the decision back to the contractor. The detail draws on HMRC's own guidance on understanding off-payroll working (IR35).

IR35 Status Is About Employment, Not the Contract Label

IR35, properly the intermediaries legislation, asks a single hypothetical question. If you stripped away the contractor's limited company and looked only at the relationship between the worker and the end-client, would it look like employment? If yes, the engagement is inside IR35 and should be taxed broadly as employment. If no, the contractor is genuinely in business on their own account and the engagement is outside IR35. The company sitting in the middle does not change the answer; the tests look straight through it to the working reality.

Because the test is about the real relationship, a contract full of outside-friendly clauses does not settle the matter on its own. HMRC and the tax tribunals look behind the paper to what actually happens day to day. The contract is evidence, and strong wording helps, but only where the working practices match it.

The Three Tests That Decide Status

The framework comes from the long-standing case of Ready Mixed Concrete (1968) and the case law that has refined it since. Three tests carry the most weight, and an honest assessment works through all three rather than seizing on one favourable fact.

Personal Service and the Right of Substitution

An employee must do the work personally. A genuine business can send a suitably qualified substitute in its place. An unfettered right for the contractor's company to provide a substitute, with no client veto beyond objective qualification, security clearance, and right-to-work checks, is one of the strongest pointers to outside status. A right that lets the client refuse or hand-pick the substitute is treated as no real right at all.

Control

Control is about who decides how, when, where, and in what order the work is done. The more the contractor holds those decisions, the more the engagement looks like an independent business delivering an outcome. The more the client directs the work task by task and slots the contractor into its management structure, the more it looks like employment.

Mutuality of Obligation

Mutuality of Obligation, or MOO, is the obligation of the client to offer work and the worker to accept it. A genuine contracting relationship has neither: no guaranteed hours, no duty to provide continuous work, and no duty to take whatever is offered. MOO is the test most often under-weighted by automated tools and is examined more closely in the piece on Mutuality of Obligation and the right of substitution.

Alongside these three, the tribunals weigh whether the contractor carries genuine financial risk, provides their own equipment, holds professional insurance, and serves other clients, the broader "in business on your own account" picture. No single factor is decisive; status is reached by standing back and weighing the whole.

Who Decides: the Off-Payroll Working Rules

Knowing the tests is one thing. Knowing who applies them, and who carries the tax risk if they get it wrong, is a separate question answered by the off-payroll working rules in Chapter 10 of ITEPA 2003. The answer has changed twice, and it now depends on the size and sector of the end-client.

Public Sector: Changed in April 2017

From April 2017, responsibility for determining IR35 status in the public sector shifted from the contractor to the public authority engaging them. The public body decides the status, and where the engagement is inside IR35, the fee-payer (the agency or body that pays the contractor's company) deducts Income Tax and employee National Insurance at source and accounts for employer National Insurance.

Private and Voluntary Sector: Changed on 6 April 2021

On 6 April 2021, the same reform was extended to medium and large clients in the private and voluntary sectors. It had originally been planned for April 2020 but was delayed by twelve months because of the coronavirus pandemic. For these clients, the end-client now determines status, records it in a Status Determination Statement, and passes it down the supply chain. If the determination is inside IR35, the fee-payer deducts tax and National Insurance before the money reaches the contractor's company.

Where the client makes the determination, it must do so with reasonable care and issue a Status Determination Statement the contractor can challenge. The mechanics of reading and disputing that statement are covered in the guide to decoding the Status Determination Statement and your right to appeal.

The Small Company Exemption

The off-payroll rules do not apply to every client. Where a contractor provides services to a small client outside the public sector, the responsibility for deciding status stays with the contractor's own intermediary, the limited company, exactly as it did before 2021. In that situation the contractor assesses their own status against the three tests and operates the original IR35 rules through their company.

A client is small for these purposes by reference to the Companies Act 2006 size limits. A client is medium or large, and therefore caught by the off-payroll rules, if it exceeds two or more of three thresholds. For periods before 6 April 2025 those thresholds were turnover of more than £10.2 million, a balance sheet total of more than £5.1 million, and more than 50 employees. From 6 April 2025 the financial limits rose to turnover of more than £15 million and a balance sheet total of more than £7.5 million, while the 50-employee limit was unchanged. Always confirm the current figures on the relevant GOV.UK page before relying on them.

How to Assess a Specific Contract

Where you are responsible for the determination, or where you want to sense-check a client's decision, work through the engagement against each test in turn rather than reaching for a single overall impression.

• Substitution: is there a genuine, unfettered right to send a qualified substitute, and has it ever been offered or used?
• Control: do you decide the method, hours, location, and sequence of the work, or does the client direct you task by task?
• Mutuality: is the client free not to offer work, and are you free to decline it, both during and after the engagement?
• Financial risk: do you carry the cost of putting defective work right, provide your own core equipment, and hold professional insurance?
• Integration: are you kept outside the client's appraisal, disciplinary, and staff-benefit structures rather than being treated as part of the team?

HMRC's Check Employment Status for Tax (CEST) tool offers an indicative output, but it is not binding and is widely regarded as under-weighting Mutuality of Obligation, so it should never be the sole basis for a determination. Status is a matter of judgement across all the tests, which is why marginal cases benefit from a specialist contract and working-practice review. Professional bodies such as the ICAEW publish guidance on the employment status tests for members advising contractors.

Can My Status Differ Between Contracts?

Yes. IR35 status is assessed contract by contract, on the working practices of each engagement. A contractor can hold one inside-IR35 contract and one outside-IR35 contract at the same time through the same limited company, because each is judged on its own facts. There is no single status that attaches to the contractor or the company across all their work.

What Changed and Why It Matters

The underlying status tests have not changed; what changed in 2017 and again in 2021 is who applies them and who is liable. Before the reforms, the contractor self-assessed and carried the risk. Now, for public sector and medium or large private sector engagements, the end-client decides and the fee-payer deducts, which is why blanket inside determinations and disputed Status Determination Statements have become the live battleground. Understanding the tests is what lets a contractor recognise when a determination is wrong and challenge it on the evidence rather than the label. The full picture sits in the definitive guide to IR35 and the off-payroll working rules.