IR35 is tax legislation that applies when a contractor works through a limited company but would be classified as an employee if working directly for the client. If caught, the contractor pays income tax and National Insurance as if employed.

Who determines IR35 status?

For private sector engagements with medium or large clients, the client issues a Status Determination Statement. For small clients (under Companies Act thresholds), the contractor determines their own status.

What are the three IR35 tests?

Control: does the client control how, when and where you work? Substitution: can you send a substitute? Mutuality of obligation: are you required to accept work offered? Being genuinely outside IR35 requires independence on all three.

What should my contract include to support outside-IR35?

Your contract should include a substitution clause, confirm you control your working methods, state there is no obligation to offer or accept future work, and reflect financial risk (you fix errors at your own cost).

IR35 Guide 2026 — Inside or Outside? Freelancer and Contractor Tax Rules

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Freelance & Contractor Agreement — IR35 Aware

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What is IR35?

IR35 — officially the Intermediaries Legislation — is a set of tax rules that apply when a contractor or freelancer provides services through a limited company (a Personal Service Company or PSC) but would be classed as an employee if they worked directly for the client.

If HMRC determines that IR35 applies to a contract, the contractor pays income tax and National Insurance contributions as though they were an employee — losing the tax advantages of contracting through a limited company.

⚠️ Off-payroll rules (IR35 reform) — medium and large clients Since April 2021, medium and large private sector clients have been responsible for determining IR35 status and issuing a Status Determination Statement. If a client wrongly determines "outside IR35", the client becomes liable for unpaid tax. Only small companies (as defined by the Companies Act 2006) still leave status determination with the contractor.

The Three IR35 Tests

HMRC assesses IR35 status using three core factors — drawn from case law stretching back to the 1968 Ready Mixed Concrete case:

1. Control

Does the client control how, when, and where you work? High control indicates employment. A genuine contractor sets their own working methods, chooses their hours, and decides how to deliver the output — the client cares about the result, not the process.

2. Substitution

Can you send a qualified substitute to do the work without the client's approval? A genuine right of substitution is a strong indicator of self-employment. The right must be genuine — it must exist in the contract and in practice. A clause that says "with client approval only" is weaker.

3. Mutuality of Obligation

Is the client obliged to offer work, and are you obliged to accept it? In a genuine contracting relationship, there is no obligation on either side beyond the current project. If the client expects you to be available and you expect to be offered ongoing work, mutuality of obligation points towards employment.

Other factors HMRC considers Integration (are you treated as part of the team?), financial risk (do you bear the cost of fixing errors?), provision of equipment (do you use your own tools?), and exclusivity (are you free to work for other clients?). No single factor is decisive — HMRC looks at the overall picture.

Status Determination Statement (SDS)

Medium and large clients must issue a written Status Determination Statement before or at the start of the engagement. The SDS must state whether IR35 applies and give reasons. Contractors can dispute a determination — the client must respond within 45 days.

The HMRC CEST Tool

HMRC's Check Employment Status for Tax (CEST) tool is available online at gov.uk. It produces a result that HMRC will stand by if the information provided is accurate and honest. However, CEST has been criticised for not adequately reflecting mutuality of obligation, and a "cannot determine" result from CEST means the contract needs professional review.

What Your Contract Must Say

The written contract is not the whole picture — IR35 status depends on working practices in reality, not just what the contract says. However, a contract that contradicts outside-IR35 indicators is damaging. Your contract should:

Include a genuine substitution clause (not subject to client approval)
Confirm you control your working methods and do not receive day-to-day direction
State there is no obligation to offer or accept future work
Reflect that you bear financial risk — you fix errors at your own cost
Confirm you are free to work for other clients simultaneously
Avoid language like "standard hours", "holiday entitlement", or "notice period"

IR35 Penalties

Where IR35 applies and has not been correctly applied, HMRC can recover the unpaid tax and National Insurance, plus interest and penalties of up to 100% of the unpaid amount. The client is liable where they issued the SDS; the contractor is liable in small-company cases.

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Freelance & Contractor Agreement — IR35 Aware (UK)