IR35 (the 'off-payroll working rules') is the single biggest issue in UK contractor contracts. If HMRC decides you're 'inside IR35', the engagement is taxed like employment — but without the employment rights. If you're 'outside IR35', you keep tax efficiency and flexibility but must genuinely be running a business. Since April 2021, medium and large private-sector clients (and all public-sector clients) make the status determination — not the contractor. Before signing, check the Status Determination Statement (SDS) and whether the written terms reflect working reality.
What is a IR35 Status Determination?
IR35 is the UK tax legislation (Chapter 8 Part 2 ITEPA 2003 for pre-2017 engagements, and Chapter 10 Part 2 ITEPA 2003 as inserted by the Finance Act 2017 and extended to the private sector in April 2021) that treats engagements between a contractor's personal service company (PSC) and a 'client' as employment for tax purposes where the contractor would be an employee absent the PSC. The status determination is made by the end-client (for medium/large private and all public-sector clients) via a Status Determination Statement (SDS). Key tests are from Ready Mixed Concrete v Minister of Pensions (mutuality of obligation, control, personal service), and recent cases include Atholl House, Kickabout Productions, and the PGMOL v HMRC Supreme Court decision.
Red flags to watch for
An unfettered right of substitution is the strongest indicator of self-employment. Substitution clauses that require client consent or reasonableness are weak evidence.
If the client must offer work and the contractor must accept it, MOO is present — which points to inside IR35.
Control over method, hours, and location pushes the engagement inside IR35. A good outside-IR35 contract reflects autonomy.
Post-April 2021, the SDS drives tax treatment. A contract that doesn't match the SDS creates uncertainty and risk for both parties.
Running a business implies financial risk. Hourly time-and-materials with no rectification obligation is weak evidence of business-on-own-account.
Being embedded in the client's organisation (ID badge, mandatory meetings, team responsibilities) is strong inside-IR35 evidence.
Exclusivity is inconsistent with self-employment and strongly suggests inside IR35.
Your legal rights
UK contractors are protected by the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 2 Chapters 8 and 10 (off-payroll working), the Employment Rights Act 1996 for any 'worker' or 'employee' status, the Agency Workers Regulations 2010, and HMRC's statutory Status Determination Statement and client-led dispute process. Case law includes Ready Mixed Concrete v MoP (1968), Hall v Lorimer (1994), Autoclenis Ltd v Belcher (2011), HMRC v Atholl House Productions (CA, 2022), and the Supreme Court in HMRC v PGMOL (2024). Contractors can challenge an SDS via the client-led disagreement process within 45 days. Employment-rights claims (e.g. worker status) go to Employment Tribunals; tax issues to the First-tier Tribunal (Tax).
Questions to ask before you sign
- 1Has the client issued a Status Determination Statement, and is it inside or outside IR35?
- 2Does the written contract reflect the day-to-day working reality (control, MOO, substitution)?
- 3Is there an unfettered right of substitution, and how has it been used in practice?
- 4What is the rectification/financial-risk profile of the engagement?
- 5Are there exclusivity clauses that prevent me from serving other clients?
- 6What is the client-led dispute process if I disagree with the SDS?
- 7If inside IR35, who is the 'fee-payer' and how is PAYE operated?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.