Inside or Outside IR35 – what determines IR35 status?

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Determining the IR35 status of an assignment can be complicated. You only need to look at IR35 case law to see that different judges reach different conclusions, even when presented with the same facts. The difficulty arises because IR35 legislation fails to define what an employment relationship is, so we have to look to case law for guidance.

There are several factors that need to be taken into account in order to assess the IR35 status of an assignment, none of which are determinative on their own. We’ve outlined the key factors that impact on IR35 status below:

Personal Service/Substitution

If the contractor has the right to provide a substitute this is a strong indicator towards a contract sitting outside IR35. However, if there are too many restrictions, for example an interview process, it is unlikely to be viewed as a genuine right of substitution.

Think of it like this: if you call a plumber to fix a leaking boiler, would you care if it was the plumber you spoke to on the phone, or just someone qualified to do the job? This is the right of substitution - an employee couldn’t send someone else to fill their place for their day at work.

Provided another suitably qualified contractor could be sent as a replacement to provide the contracted services, then the contract would most likely fall outside IR35.

There should be a right of substitution clause in the contract specifying the contractors right to do so, it also helps if there is agreement in writing of how this would work in practice.


For a position outside IR35 the level of control exercised over the contractor by the end hirer must fall short of what would be expected in an employer/employee relationship. If any of the below apply this could indicate that the contract is inside IR35:

  • The client has supervision and control over the contractor’s work. If the client can dictate how the work is completed and has the right to direct the contractor, this is an indicator that the assignment will fall inside IR35.
  • The client can control what the contractor works on. This could be evidenced by an exclusivity clause meaning the contractor is unable to work with anyone else while engaged by the client.
  • The client can control when the contractor must work. This could be seen in the specification of start and finish times or which days the contractor must work for the client.
  • If the client specifies where the work must be completed, for example from their offices.

All of the above point towards a position inside IR35. A genuine contractor should have control over how, when and who they work with.

Mutuality of Obligation (MoO)

Is the contractor free to choose the jobs they work? If their contract specifies exclusivity or states any amount of obligated hours of work a week, or an excessive notice period, this would point to a position inside IR35. Genuine contractors are able to take whichever projects they choose from whatever client they wish to work with. They should also be free to turn down work from any given client.

HMRC’s Check Employment Status for Tax (CEST) tool, currently omits MoO, as in their opinion MoO is always present in a contract. This is disappointing as MoO is often referenced in case law as a key indicator of employment status.

What else?

In addition to the key employment tests above there are a number of other factors that must be considered when looking at the IR35 status of a contract:

  • Financial risk – in a genuine business, opportunities to make a profit and a risk of making a loss should both exist. Being able to demonstrate that the contractor carries financial risk can be a strong indicator towards a position outside IR35.
  • Part and parcel – being integrated into the end-hirer’s business is a strong indicator towards an employment relationship. If the contractor will be managing employees of the end-hirer or fulfilling a need that would usually be met by an employee, it’s likely the contract will fall inside IR35.
  • Provision of equipment – if the contractor is expected to supply their own equipment in order to complete the assignment this would indicate a position outside IR35.
  • In business factors – is the contractor acting like a business. Do they have a company website, an office address, even branded stationery? If they do, this could point to an outside IR35 position.

It’s important to remember, and often referenced in case law, that IR35 is not a tick box exercise. There is no one determining factor that will place a contract outside, or inside IR35.

The only way to be confident that an IR35 status is set correctly is to engage an expert. Luckily, the team here at Parasol are experts in IR35 and are more than happy to help you with any queries you may have whether you're a recruiter, an end-hirer or contractor. Simply call us on 01925 644 474.