How to Determine Your IR35 Status: Step-by-Step

Determining whether your contracting engagement falls inside or outside IR35 is one of the most consequential decisions you will face as a contractor. Get it right, and you can legitimately structure your affairs to minimise your tax liability. Get it wrong, and you face either an unexpected tax bill from HMRC or unnecessary tax overpayment. In this guide, I will walk you through the step-by-step process of assessing your IR35 status.

Why Accurate Assessment Matters

The financial difference between inside and outside IR35 is significant. For a contractor earning £500 per day, being inside IR35 can reduce your annual take-home pay by £10,000-20,000 compared to being outside. This is not a trivial sum — it is the difference between saving for a deposit, investing in your business, or simply covering your living costs.

Beyond the financial impact, an incorrect determination can lead to penalties. If HMRC investigates and finds that you should have been inside IR35 when you declared yourself outside, you may owe backdated tax, interest, and potentially penalties. Conversely, if your client has unnecessarily placed you inside IR35, you are overpaying tax with no mechanism to easily reclaim it.

According to HMRC's off-payroll working guidance, the determination should be based on the actual working practices, not just the contractual terms.

Step 1: Understand Who Is Responsible

The first step is understanding who has the legal responsibility for determining your IR35 status:

If your end client is a medium or large private sector company, or any public sector body, the client is responsible for determining your status. They must provide you with a Status Determination Statement (SDS) explaining their decision. You have the right to challenge this determination through the client's dispute resolution process.

If your end client is a small private sector company (meeting at least two of: turnover under £10.2 million, balance sheet under £5.1 million, fewer than 50 employees), your personal service company (PSC) is responsible for the determination.

Understanding who is responsible matters because it affects your approach. If the client is determining your status, you need to ensure they have accurate information about your working practices. If you are responsible, you need to conduct a thorough self-assessment.

Step 2: Assess the Control Test

The control test examines the degree to which the client controls how, when, and where you work. Ask yourself these questions:

• Do you decide how to complete the work, or does the client dictate the method?
• Can you choose your working hours, or are you required to follow set times?
• Are you free to work from any location, or must you be at the client's premises?
• Does the client supervise your work in progress, or do they only review the finished output?

Points towards outside IR35: You determine your own methods, set your own hours, choose your location, and deliver agreed outputs without day-to-day supervision.

Points towards inside IR35: The client controls your methods, requires specific hours, mandates office attendance, and supervises your work closely.

Gather evidence for your assessment. Keep emails where the client agrees to your proposed approach, records of days you chose not to work, and documentation of times you worked from different locations.

Step 3: Assess the Substitution Test

Substitution is one of the strongest indicators of self-employment. The question is whether you have a genuine, unfettered right to send a substitute to perform the work in your place.

Key considerations:

• Does your contract include a right of substitution?
• Has the right ever been exercised, or could it realistically be exercised?
• Would the client accept a suitably qualified substitute without unreasonable refusal?
• Would you pay the substitute yourself (not the client)?

Points towards outside IR35: A genuine, contractual right to substitute exists, the client would accept a qualified replacement, and you would be responsible for paying the substitute.

Points towards inside IR35: Substitution is not permitted, or the right exists on paper but would never be allowed in practice, or the client has the unfettered right to reject any substitute.

For a deep dive into substitution, read my dedicated article on IR35 and substitution.

Step 4: Assess Mutuality of Obligation

Mutuality of obligation (MOO) examines whether there is a mutual commitment between you and the client. In an employment relationship, the employer must provide work and the employee must accept it.

Ask yourself:

• Is the client obligated to provide you with a minimum amount of work?
• Are you obligated to accept any work the client offers?
• Can you turn down assignments without consequence?
• Can the engagement end without notice from either side?

Points towards outside IR35: There is no obligation for the client to offer work beyond the current project, and no obligation for you to accept future work. The engagement is project-based with defined deliverables.

Points towards inside IR35: There is an ongoing expectation that the client will provide work and you will do it, similar to an employment arrangement.

Step 5: Assess Financial Risk

Genuine self-employment involves financial risk. Consider whether:

• You provide your own equipment and tools (laptop, software licences, specialist tools)
• You carry professional indemnity insurance
• You could make a financial loss on the engagement (for example, if you underquote or if the work takes longer than expected)
• You are responsible for correcting defective work at your own cost
• You have invested in training or certification to win the contract

Points towards outside IR35: You bear genuine financial risk, invest your own resources, and could lose money.

Points towards inside IR35: You have no financial risk, the client provides all equipment, and you are paid regardless of the quality of your output.

Step 6: Assess Part and Parcel Indicators

This step examines how integrated you are into the client's organisation:

• Do you attend staff meetings, social events, or team-building activities?
• Do you have a client email address, building pass, or listing on the intranet?
• Are you included in organisational charts or performance reviews?
• Do you receive benefits like parking, canteen access, or gym membership?

Points towards outside IR35: You operate independently, are clearly identified as a contractor, do not attend internal events, and have no client email or permanent desk.

Points towards inside IR35: You are indistinguishable from permanent staff in how you are treated within the organisation.

Step 7: Consider the Overall Picture

No single test determines IR35 status. It is the overall picture that matters. A strong substitution clause might outweigh weak control indicators. Significant financial risk might compensate for some integration into the client's organisation.

HMRC's own assessment tool, known as the Check Employment Status for Tax (CEST) tool, attempts to weigh these factors. However, CEST has been widely criticised for its accuracy. My guide on IR35 and the CEST tool explains how HMRC's test works and its limitations.

The leading case law on this area, from decisions like Ready Mixed Concrete v Minister of Pensions through to more recent tribunal decisions, consistently emphasises that no single factor is decisive. For key cases that have shaped the rules, see my article on IR35 case law decisions.

Step 8: Document Your Assessment

Whatever your conclusion, document it thoroughly. Keep:

• A written record of your assessment, including which factors you considered and why
• Copies of your contract and any amendments
• Correspondence with the client about working arrangements
• Evidence of substitution rights being discussed or exercised
• Records of financial risk (insurance policies, equipment purchases, training costs)
• Proof of independent operation (your own website, other clients, marketing materials)

This documentation is your defence if HMRC ever queries your status. Contemporaneous evidence (created at the time) is far more persuasive than retrospective justifications.

According to IPSE, contractors who maintain detailed evidence of their working practices are significantly more likely to defend their status successfully.

Step 9: Seek Professional Review (Where Appropriate)

For high-value contracts or ambiguous situations, consider getting a professional IR35 review. Specialist firms assess your contract and working practices against the established tests and provide a written opinion. This typically costs £200-500 and can include insurance against the cost of an HMRC investigation.

A professional review is not mandatory, but it provides peace of mind and can be valuable evidence if HMRC challenges your status.

Using Technology to Help

Accounted's IR35 assessment tool walks you through the key tests and provides a clear indication of your likely status. It is not a replacement for professional advice, but it gives you a structured framework for your assessment.

For sole traders and contractors managing their finances, Accounted handles much more than IR35. From self-assessment filing to tax deductions, I can help you stay on top of every aspect of your contracting finances. Visit our features page to learn more.

Final Thoughts

Determining your IR35 status is not a box-ticking exercise. It requires honest assessment of your actual working practices, supported by evidence and documentation. The temptation to conclude that every engagement is outside IR35 is understandable, but the risks of an incorrect determination are real.

Take the time to assess properly, document your reasoning, and seek professional help when the stakes are high. Your future self — and your tax bill — will thank you.

Penny, your AI bookkeeper, tracks your tax position in real time and flags opportunities to reduce your bill. Meet Penny →