IR35 contract reviews: what they check and why they matter

What is IR35 and why does it matter?

IR35, also known as the off-payroll working rules, is UK tax legislation designed to ensure that individuals who provide services through an intermediary (like their own limited company) but would be considered employees if engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as employees. It aims to prevent "disguised employment" where a worker operates as a contractor to gain tax advantages while effectively working like an employee.

Getting your IR35 status wrong can lead to significant financial penalties, including backdated tax, National Insurance, interest, and fines for both the contractor and, in many cases, the client.

What is an IR35 contract review?

An IR35 contract review is a professional assessment of your contractual terms and actual working practices against HMRC's employment status criteria. It provides an expert opinion on whether your engagement falls "inside" or "outside" IR35.

This dual assessment is crucial because HMRC will look beyond just the written contract to understand the reality of your working relationship. A contract might state you're outside IR35, but if your day-to-day work mirrors that of an employee, HMRC could deem you "inside."

What does an IR35 contract review check?

A comprehensive IR35 contract review examines various factors to build a holistic picture of your employment status. These factors are derived from decades of case law and are what HMRC considers when making a determination.

Key indicators include:

• Substitution: Can you send a suitably qualified substitute to perform the work if you are unable to? A genuine, unfettered right of substitution is a strong indicator of being outside IR35. The client should only be able to refuse a substitute on reasonable grounds, such as lack of qualifications or security clearance.
• Control: Does the client dictate how, when, and where you perform the work? Or do you have autonomy over your working methods, schedule, and location? High levels of client control suggest employment.
• Mutuality of Obligation (MOO): Is there an obligation for the client to offer you continuous work, and an obligation for you to accept it? A lack of ongoing obligation to offer or accept work is characteristic of self-employment. Contracts for specific projects with clear start and end dates typically indicate outside IR35.
• Financial Risk: Do you bear any financial risk, such as liability for rectifying errors at your own cost or providing your own equipment? Taking on financial risk is a hallmark of being in business for yourself.
• Part and Parcel: Are you integrated into the client's organisation, for example, by using their employee benefits, attending staff meetings, or having a company email address? Being "part and parcel" of the client's organisation suggests employment.
• Provision of Equipment: Do you use your own equipment and resources, or does the client provide everything? Generally, self-employed contractors provide their own tools.
• Business Presence: Do you operate as a genuine business with multiple clients, a website, business insurance, and professional branding?
• Exclusivity: Are you restricted from working for other clients during the engagement? A lack of exclusivity points towards self-employment.

Who is responsible for IR35?

The responsibility for determining IR35 status depends on the size of the client you are working for.

• Medium and Large Clients (Private and Public Sector): For medium and large-sized private sector clients, and all public sector clients, the client is responsible for determining your IR35 status and issuing a Status Determination Statement (SDS). The fee-payer (often the client or an agency) is then responsible for deducting Income Tax and NICs if the engagement is deemed "inside IR35."
• Small Clients (Private Sector): If you provide services to a small client in the private sector, the responsibility for determining your IR35 status remains with your own intermediary (usually your limited company). This means you, as the contractor, must take "reasonable care" in making this assessment.

From 6 April 2026, the thresholds for what constitutes a "small" company are increasing. A company will be considered small if it meets two of the following: turnover of £15 million or less (previously £10.2 million), a balance sheet total of £7.5 million or less (previously £5.1 million), and 50 employees or fewer (unchanged). This change means some companies previously classified as medium will become small, shifting the IR35 determination responsibility back to the contractor for those engagements.

Common mistakes

• Relying solely on the contract wording: HMRC will always look at both the written contract and the actual working practices. If they don't align, the working practices will usually take precedence.
• Ignoring working practices: Even with a well-drafted contract, if your day-to-day work resembles that of an employee, you could still be deemed inside IR35. Keep records of how you operate as a genuine business.
• Not reviewing regularly: Contracts and working arrangements can evolve. It's important to review your IR35 status for each new contract and periodically for ongoing engagements.
• Assuming "outside IR35" without proper checks: Making an incorrect determination without taking reasonable care can lead to significant penalties.