Here is a number worth paying attention to: if you get your IR35 status wrong, you could end up keeping just 55p for every £1 you earn, instead of the 75 to 80p an outside-IR35 contractor typically retains.
That is not a small difference. It can cost you thousands of pounds each year in lost income.
IR35 remains one of the most misunderstood parts of UK tax law, and HMRC takes it seriously. It has specialist teams focused on checking compliance. If you get it wrong, you could face large tax bills, penalties, and reviews going back up to six years. Saying you were not aware will not protect you.
The good news is that determining your IR35 status is easy once you understand the key factors.
This guide explains how to determine IR35 status step by step. You will learn what HMRC looks at, which tools you can use, who makes the decision, and how to protect yourself with the right records. Whether you are a contractor working through a limited company or a hiring manager responsible for contractors, this guide will help you get it right.
What is IR35 and Why does Your Status Matter?
IR35 is the common name for the UK’s off-payroll working rules, officially called the Intermediaries Legislation. HMRC introduced it to tackle “disguised employment”, where someone works through a limited company (often a Personal Service Company, or PSC) but operates in a way that is effectively the same as an employee.
In simple terms: if you would be an employee of your client if hired directly, HMRC expects you to pay tax like one.
If you are inside IR35, HMRC treats your income as employment income. You pay income tax and National Insurance, including employer National Insurance, on a deemed payment based on your contract income. This usually means your take-home pay reduces significantly.
If you are outside IR35, HMRC accepts that you are running a genuine business. You can pay yourself through a mix of salary and dividends, which is usually more tax efficient.
The financial difference is significant. Contractors inside IR35 often keep around 55–65% of their gross income, while those outside IR35 retain closer to 70–80%. On a £500 day rate, this can mean a difference of £20,000 or more each year.
IR35 applies only if you work through an intermediary such as a limited company. If you operate as a sole trader, IR35 does not apply directly, although HMRC may still review your employment status under other rules.
Who is Responsible for Determining Your IR35 Status?
This is the question that catches most contractors and businesses. The answer depends on your client’s size and whether they are in the public or private sector.
Small private sector clients
If your client qualifies as a small company, you are responsible for deciding your IR35 status. From 6 April 2025, A company counts as small if it meets at least two of these criteria for two consecutive years:
- Turnover of £15 million or less
- Balance sheet total of £7.5 million or less
- 50 employees or fewer
These thresholds apply for the 2026/2027 tax year. If your client meets this, you assess your own status.
Medium and large private sector clients
If your client does not meet the small company criteria, the client decides your IR35 status.
This rule has applied since April 2021. The client:
- Reviews the engagement
- Makes the IR35 decision
- Issues a Status Determination Statement (SDS) with reasons
Public sector bodies
Public sector bodies have been responsible for IR35 decisions since April 2017.
This includes:
- Government departments
- NHS organisations
- Local authorities
What is a Status Determination Statement?
A Status Determination Statement, often called an SDS, is a formal written document where the client confirms your IR35 status and explains the reasons behind it. The client must share the SDS with:
- You, the contractor
- The agency, if one is involved
As a contractor, you have the legal right to know both your IR35 status and how the decision was reached. If you believe the determination is wrong, you can challenge it through the client’s formal dispute process.
Important:
If you work through a recruitment agency, the agency is usually the fee payer. This means it handles PAYE if the contract is inside IR35. However, the end client makes the IR35 decision, not the agency.
The 3 Core Tests HMRC Uses to Determine IR35 Status
When HMRC decides whether you fall inside or outside IR35, it focuses on 3 core tests rooted in UK case law. These tests look beyond your contract and examine how you actually work in practice.
Test 1: Control - who decides how, when and where you work?
Control is one of the strongest indicators of employment status. HMRC checks whether your client controls not just what you do, but how you do it, when you do it, and where you work.
A genuine contractor delivers an agreed outcome. You decide how to complete the work. The client focuses on the result, not your day-to-day activity.
You may fall inside IR35 if your client:
- Sets your working hours
- Tells you which tools or systems to use
- Assigns tasks on an ongoing basis
- Treats you like part of the internal team
Ask yourself:
- Do I control how I deliver the work?
- Can I choose my working hours and location?
- Does the client treat me like an employee?
Important: working remotely does not mean you are outside IR35. If the client still controls your work through calls, deadlines, and instructions, HMRC may still class you as inside IR35.
The more freedom and autonomy you have over how you deliver the work, the stronger your outside IR35 position.
Test 2: Substitution - can you send someone else?
Substitution is a strong sign that you are outside IR35.
A genuine contractor can send a qualified substitute to complete the work. This shows the client hires your business for a result, not you as an individual.
For substitution to count, it must be:
- Written clearly into your contract
- Practical and usable in real life
- Not heavily restricted by client approval
Since updates to the CEST tool in April 2025, simply suggesting a replacement is not enough if the client hires and pays them directly. The right must be genuine, practical, and part of how your business works.
Ask yourself:
- Does my contract allow substitution without conditions?
- Could I realistically send someone else to do the work?
- Have I ever used or offered a substitute?
If the client only wants you personally and would not accept a replacement, this suggests inside IR35.
Test 3: Mutuality of obligation (MOO) - is there an ongoing expectation of work?
This test looks at whether there is an ongoing obligation between you and the client.
MOO looks at whether:
- The client must offer you work
- You must accept that work
In employment, both obligations exist. In genuine contracting, they should not.
A contractor relationship should end when the project ends. There should be no expectation of ongoing work on either side.
Warning signs of inside IR35:
- Your contract keeps renewing without a clear break
- The client always has work ready for you
- You are expected to be available whenever needed
- You work with the same client for years without a real gap
Long-term contracts with one client often attract more attention from HMRC. If you have worked with the same company for several years, you need to show that each contract is project-based, with no ongoing obligation on either side.
Other Factors That Affect Your IR35 Status
The three main tests carry the most weight, but HMRC looks at the full picture. These extra factors can push a borderline case one way or the other.
Financial risk
Genuine contractors take on real financial risk. You fix mistakes at your own cost, invoice for completed work or milestones, and only get paid when you deliver.
If your income looks like a fixed monthly payment regardless of output, HMRC may treat it as employment income.
Being “part and parcel” of the organisation
HMRC checks how integrated you are within the client’s business. If you look and act like part of the team, this can count against you.
Common red flags include:
- Having a company email address
- Using a permanent desk in the office
- Accessing staff perks (like a canteen or benefits)
- Managing employees
- Attending company events as a staff member
- Appearing on the company website or org chart
Even small details, such as signing documents as a staff member, can add up.
Using your own equipment
Using your own tools, laptop, and software supports an outside IR35 position. It shows you operate as an independent business.
If the client provides everything you need, HMRC may see that as an employment-style setup.
Multiple clients
Working with more than one client at the same time strongly supports self-employment. It shows you are running a business, not relying on a single engager.
If all your income comes from one client over a long period, HMRC is more likely to question the arrangement.
Length of the engagement
There is no fixed time limit that triggers IR35. However, the longer you work with one client, the more closely HMRC will examine your status.
Long-term contracts should be reviewed regularly and supported with clear records to show that the work is project-based, not ongoing employment.
Inside vs Outside IR35 - Key Indicators
| Factor | Outside IR35 | Inside IR35 |
|---|---|---|
| Control | You decide how the work is done | Client directs your method and hours |
| Substitution | You can send a qualified substitute | You must personally deliver the work |
| Mutuality of obligation | No guarantee of ongoing work | Client always offers, you always accept |
| Financial risk | You correct mistakes at your own cost | Client absorbs cost of rework |
| Equipment | You use your own tools and devices | Client provides all equipment |
| Integration | Clearly separate from staff | Treated as part of the team |
| Multiple clients | You work for several clients | Single client, full-time engagement |
| Contract payment | Invoiced on project milestones | Regular, fixed, salary-like payments |
How to Use HMRC's CEST Tool to Check Your IR35 Status
HMRC offers a free online tool called Check Employment Status for Tax (CEST). It asks series of questions about your engagement and returns one of three results:
- inside IR35
- outside IR35
- “unable to determine”
The main advantage is clear. If you answer the questions accurately and follow HMRC guidance, HMRC will stand by the result. That makes a properly completed CEST outcome useful evidence if your status is ever challenged.
How to use CEST correctly
Treat CEST as a formal compliance exercise, not a quick checkbox.
- Gather your contract and details of your actual working practices before you start
- Answer based on what really happens day to day, not just what the contract says
- Be honest about grey areas like substitution or control
- Save and store the dated result as evidence
- Re-run the tool whenever your contract renews or your working practices change
If your contract includes a substitution clause but your client would not realistically accept a substitute, reflect that in your answers. HMRC looks at reality, not paperwork.
CEST limitations you need to know
CEST has improved, but it still has gaps. It simplifies complex legal tests, and many real-world scenarios do not fit neatly into its logic.
The April 2025 update added more clarity, including a decision matrix with 72 possible paths. However, 34 of these lead to an “unable to determine” result. This is still the case in 2026.
If you receive an “unable to determine” result, do not guess or assume you are outside IR35. That is a high-risk move. It means your case is genuinely borderline and needs expert review.
GoForma tip
Use CEST as a starting point, not your final decision. It helps you structure your thinking and build basic evidence, but it does not replace a proper contract review.
A specialist contractor accountant can assess nuances that CEST misses, review both your contract and working practices, and give you a defensible position backed by written evidence. That matters if HMRC ever opens an enquiry.
What is a Status Determination Statement (SDS) and What Should it Include?
If your client is a medium or large organisation, in either the public or private sector, they must issue a Status Determination Statement (SDS) before you start work or when they review your IR35 status.
An SDS is not optional. It is a formal document that sets your tax position for that engagement.
A valid Status Determination Statement must:
- Clearly state if the contract is inside or outside IR35
- Explain the reasons behind that decision, based on your actual working arrangement
- Be shared with you and with any agency involved in the contract chain
If any of these are missing, the SDS may not meet HMRC requirements.
Where businesses get SDS wrong
In practice, many organisations fail to apply the rules properly. Common issues include:
- Passing the decision to HR or procurement teams who do not understand day-to-day working practices
- Applying blanket decisions across roles instead of assessing each contract individually
- Giving vague explanations that mention tests but do not apply them to the real engagement
- Ignoring input from the line manager, who usually understands how the contractor actually works
These mistakes weaken the SDS and increase the risk of incorrect determinations.
What to do if your SDS is wrong
You have the legal right to challenge an SDS if you believe it is incorrect.
Submit your disagreement through your client’s formal dispute process with clear reasoning and evidence. The client must respond within 45 days, either confirming or revising their decision.
If you are not satisfied with their response, you can take it further with HMRC.
This is where expert support matters. A specialist contractor accountant can review the contract, assess your working practices, and help you build a strong case to challenge the determination.
The Offset Rule (from April 2024)
Since April 2024, there has been a helpful change regarding the Offset Rule which improves how HMRC handles disputes.
If HMRC overturns an outside IR35 determination, it must now offset any tax already paid by your limited company, including Corporation Tax and dividend tax, against the client’s PAYE liability.
This removes the previous double taxation issue and makes the system fairer for both contractors and clients.
The Red Flags That Attract HMRC Attention
HMRC does not investigate at random. Its specialist teams use data and pattern analysis to spot contractors and businesses that are more likely to be non-compliant. Certain behaviours increase your risk significantly.
Low salary, high dividends
Taking a small director’s salary and the rest as dividends is legal and tax-efficient for genuine contractors.
However, HMRC looks closely at this structure, especially when other inside IR35 signals exist.
If your setup is questioned, you need to show that you are running a real business, not working like an employee for one client.
Being “part and parcel” of the client’s business
The more you look like an employee, the more HMRC questions your status.
Examples include:
- Having a company email
- Using a fixed desk in the office
- Attending staff events as a team member
- Being listed in internal directories
Even small signs of integration can strengthen an inside IR35 case.
Poor or inconsistent tax filings
Errors or inconsistencies across your VAT returns, Corporation Tax, or other filings can trigger wider scrutiny.
Once HMRC starts looking, it may review your IR35 status as well. Keeping your records accurate helps reduce this risk.
Working with one client long term
Working for one client over several years does not automatically place you inside IR35.
But it raises questions. HMRC will examine your arrangement more closely, and every other factor must support genuine self-employment.
No supporting documentation
HMRC will not rely on what you say. You need evidence.
This includes:
- Contracts
- CEST results
- Details of how you actually work
- Emails or messages that support your position
Without this, it becomes much harder to defend an outside IR35 status.
Key takeaway
HMRC can review your affairs going back up to six years in cases of careless behaviour, and up to 20 years where it suspects deliberate non-compliance.
Keep clear, consistent records. It is one of the simplest ways to reduce your risk.
The Consequences of Getting IR35 Wrong
Getting IR35 wrong is not a small issue. The financial impact is real, and it can take years to sort out.
For contractors
If HMRC decides your contract should have been inside IR35, you must pay:
- Backdated Income Tax and National Insurance on all affected income
- Interest from the original due dates
- Penalties based on how HMRC views your behaviour
This applies to the full period HMRC considers non-compliant, not just a single tax year.
For end clients and fee-payers
Since the 2021 changes, medium and large clients carry the risk if they get the decision wrong. If a contractor is wrongly treated as outside IR35, the client or the agency acting as the fee payer may have to pay the unpaid tax.
Penalties fall into three tiers:
- 30% of unpaid tax if HMRC believes the mistake was careless
- 70% of unpaid tax if HMRC believes you knew but did not act
- 100% of unpaid tax if HMRC believes there was deliberate concealment
For a contractor charging £500 per day, one wrong decision can cost a client between £31,000 and £48,000 for a single year, before interest and late fees are added.
Beyond the financial impact
It is not just about money.
There are also reputational risks. HMRC can name businesses that do not comply. This can affect relationships with contractors, agencies, and partners. In some cases, companies may lose access to government contracts or preferred supplier lists.
How to Determine Your IR35 Status - Step by Step
Follow below steps for every contract, whether you are a contractor reviewing a new role or a business checking your contractor setup.
Step 1: Review your contract
Start with the written agreement.
Check:
- Does the contract include a genuine, unconditional substitution clause?
- Is payment structured around deliverables or milestones rather than a regular salary?
- Does the contract reflect a specific project or outcome, with no obligation to offer or accept further work beyond it?
If it reads like an employment contract, that is the first issue to address.
Step 2: Assess your actual working practices honestly
This is where many people go wrong. What happens in reality matters more than what is written.
If your contract allows substitution but your client would not accept it, that clause has little value.
Think about your day to day work and answer honestly:
- How much control does the client have?
- Are you treated like part of the team?
- Do you take on any financial risk?
Step 3: Use the CEST tool
Complete HMRC’s CEST questionnaire using honest and accurate answers.
Save the result with the date. If the result is “unable to determine”, do not rely on it alone.
Step 4: Review the secondary factors
Go beyond the main tests.
Consider your level of financial risk, whether you use your own equipment, how integrated you are in the business, how many clients you have, and how long the contract has lasted.
Step 5: Get a professional IR35 contract review
If the contract is valuable or the situation is unclear, get expert advice.
A specialist contractor accountant can review both your contract and working practices, highlight risks, and give you a written opinion you can rely on if HMRC ever reviews your case.
Step 6: Get or issue an SDS
If you are working with a medium or large client, ask for your Status Determination Statement before you start.
If you are the client, provide a clear and well-reasoned decision for each contractor.
Step 7: Keep proper records
Keep everything organised. Store copies of:
- your contracts
- CEST results with dates
- relevant emails
- your SDS
- any professional reviews
Good records can protect you if your status is challenged.
Step 8: Review at every renewal
Your IR35 status can change.
If your contract changes, your working setup changes, or you renew with the same client, review your IR35 status again. A contract that was outside IR35 before may not stay that way.
Not sure where you stand?
Use GoForma’s IR35 quick assessment tool for an initial view in minutes. Then speak to a specialist contractor accountant for a full review and clear advice.
Get Your IR35 Status Right with GoForma
GoForma focuses on contractors, freelancers, and limited company directors. That means you get advice from people who deal with IR35 every day, not general accounting.
What you get
- Full IR35 contract reviews with a clear written opinion
- Support if you want to challenge an incorrect Status Determination Statement
- Ongoing support with accounts, payroll, and tax
- Advice on the most tax-efficient way to run your setup
- Support if HMRC opens an enquiry into your IR35 status
We have helped many UK contractors understand their position, protect their outside IR35 status with strong records, and challenge decisions that did not reflect how they actually work.
If you want clarity and confidence, speak to us.
Get a free consultation with a GoForma contractor accountant today. Whether you are new to contracting, dealing with an inside IR35 decision, or just want to check your status, we are ready to help.
FAQs About Determining IR35 Status
How do I determine my IR35 status?
You determine your IR35 status by assessing your contract and actual working practices against three primary tests: control, substitution, and mutuality of obligation. A range of secondary factors also apply, including financial risk, integration into the client's organisation, and whether you use your own equipment. HMRC's CEST tool provides a useful starting point, but a professional contract review gives you the most reliable and defensible answer.
What is the HMRC CEST tool and can I rely on it?
CEST is HMRC's online Check Employment Status for Tax questionnaire. If you answer it accurately and honestly, HMRC commits to standing by the result. However, CEST has been widely criticised for oversimplifying the employment status tests, and even in its current 2025/26 version it still produces "unable to determine" outcomes in over half of all possible scenario paths. Use it as one part of your compliance process, but not your only protection.
Who is responsible for determining IR35 status, me or my client?
It depends on the size of your end client. If your client qualifies as a small company (broadly, meeting two of: turnover under £15m, balance sheet under £7.5m, fewer than 50 employees), you determine your own status. For medium and large private sector clients, and all public sector bodies, the end client makes the determination.
What factors determine IR35 status?
The key factors are control, substitution, and mutuality of obligation. HMRC also considers financial risk, equipment, integration, and whether you work for multiple clients.
Can I challenge an inside IR35 determination from my client?
Yes. You have the right to formally dispute an SDS through your client's internal challenge process. The client must respond within 45 days, explaining either how they have revised their determination or why they are standing by it. If the dispute is not resolved satisfactorily, you can escalate to HMRC. A specialist contractor accountant can help you build a compelling challenge.
What happens if my IR35 status turns out to be wrong?
If HMRC finds that your engagement should have been inside IR35, you face backdated tax, National Insurance contributions, interest, and penalties. For post-2021 engagements with medium and large clients, the liability typically falls on the client or agency as fee-payer, not the contractor directly. The penalty rate ranges from 30% to 100% of unpaid tax depending on the severity of the error and HMRC's assessment of intent.
Does IR35 apply to sole traders?
No. IR35 applies only to contractors who provide services through an intermediary, most commonly a limited company (PSC). Sole traders pay income tax and National Insurance directly through self-assessment, and the IR35 rules do not apply to them.
How often should I review my IR35 status?
Review your status at every contract renewal, when you move to a new client, and whenever your working practices change materially. IR35 status is not permanent. A working arrangement that was correctly outside IR35 can shift inside IR35 if, for example, the client starts exercising more control or the engagement becomes open-ended.
What is a Status Determination Statement?
An SDS is the formal written document that a medium or large end client must issue to a contractor when they determine IR35 status. It must state whether the engagement is inside or outside IR35 and explain the specific reasons for that conclusion. The contractor and any agency in the supply chain must receive it before work begins.
Do I need a professional IR35 assessment?
You do not always need one, but it is strongly advised for valuable or borderline contracts. A specialist can spot risks and provide written evidence to support your position.
Does my contract determine my IR35 status?
No, the contract alone is not enough. HMRC focuses more on your actual working practices than what is written.
Can I be outside IR35 with one client and inside with another?
Yes, each contract is assessed separately. Your status depends on the terms and working practices of each engagement.
Does having multiple clients help me stay outside IR35?
Yes, working with multiple clients supports self-employment. It shows you are running a genuine business.
Disclaimer:
This article is for informational purposes only and does not constitute tax or legal advice. Always consult a qualified accountant or tax adviser for guidance specific to your circumstances.
Resources:
https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
https://www.gov.uk/guidance/check-employment-status-for-tax
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm0558
.png)