How Does IR35 Work in the UK? Everything Contractors Need to Know

How Does IR35 Work in the UK? Everything Contractors Need to Know

IR35 works by testing whether the reality of your working relationship with a client looks like employment, regardless of what your contract says — and that outcome mechanically decides who deducts your tax. If an engagement is inside IR35, the fee-payer deducts Income Tax and National Insurance before you're paid, similar to being on payroll. If it's outside, your limited company invoices and gets paid gross and you manage your own tax as a genuine business would.

That's the short version. The fuller answer involves an actual process with steps, deadlines and responsibilities — something most explanations skip in favour of just listing the legal tests. This guide covers both: how a determination actually happens from the start of a contract and the tests behind it.

The IR35 Process, From Start to Finish

Here's what happens, step by step, where the client is medium or large and therefore responsible for the determination.

1. The engagement begins — a contractor is engaged through their own limited company, often via an agency.
2. The client assesses status before work starts, based on the actual working practices agreed, not just the contract wording. CEST is a common starting point, though not always reliable on borderline cases.
3. A Status Determination Statement (SDS) is issued to the contractor (and agency) before or shortly after work starts, setting out the decision and reasoning.
4. The contractor can formally disagree, typically within 45 days of receiving the SDS. The client must respond with either a revised determination or a reasoned justification.
5. Payment follows the determination — PAYE deducted at source if inside, paid gross if outside.
6. Status is reviewed if things change — a shift in how the work is actually delivered should trigger a fresh look, since status reflects the relationship as it stands, not a one-off decision fixed for the life of the contract.

This process side of "how IR35 works" gets skipped most often, but it's worth knowing even if you never dispute a determination — it tells you what should be happening and when, so you can flag it if a client misses a step they're legally required to follow.

The Tests Behind the Determination

Control covers how much say the client has over how, when and where the work gets done. Heavy day-to-day direction points toward employment; being engaged to deliver a defined outcome on your own terms points away from it.

Substitution asks whether you could send someone else to do the work without the client having a veto. This has to be a genuine, exercisable right — an unused clause that would actually be refused in practice carries very little weight with HMRC.

Mutuality of Obligation looks at whether there's an ongoing expectation the client will keep offering work and you'll keep accepting it, the way there is in employment. Project-based, defined-scope work tends to sit outside this; an open-ended expectation of continuous work tends to sit inside it. We've covered these three tests in more depth, with worked examples, in our guide to what IR35 rules currently say.

A Worked Example

A marketing consultant is engaged by a mid-sized retailer to lead a six-month rebrand. She sets her own hours, uses her own equipment and has a genuine substitution right she's already exercised once without objection. The client's assessment weighs this correctly — genuine substitution, low control over method, defined project scope — and comes back outside IR35, with the SDS documenting each reason specifically.

Contrast that with a similar consultant on an open-ended basis, attending daily stand-ups, using a company laptop and email, with no realistic ability to send anyone else. Even with an identical contract on paper, the working practices point inside IR35 — exactly why HMRC looks past the paperwork to how the relationship actually functions.

Disagreeing With a Status Determination

You're entitled to challenge an SDS you think is wrong through the client-led disagreement process: submit your case in writing within the appeal window, setting out specifically which factors were assessed incorrectly. The client must then respond with a revised determination or a reasoned explanation for keeping the original one.

Many contractors don't use this right, either through not knowing it exists or being wary of raising it with a client they want to keep working with. If a determination looks clearly wrong, such as ignoring a substitution right you've genuinely used, it's worth raising — ideally with a contractor accountant helping you set out the case clearly.

Does Contract Length or Client Count Matter?

Not directly, but both are circumstantial evidence feeding the wider picture. A very long, continuous engagement with one client can start to resemble a permanent role in practice, though length alone has never been decisive in tribunal cases. Working for several clients simultaneously tends to support an outside-IR35 case, since it's harder to argue you're "part and parcel" of one organisation when you're clearly running an independent business. Neither factor overrides the core tests, but both get weighed alongside them.

When Working Practices Change Mid-contract

IR35 status isn't fixed for the life of an engagement. If your role shifts — more supervisory responsibility, new meetings you weren't previously part of, losing the ability to send a substitute — that should trigger a reassessment. It works the other way too: a role becoming more genuinely autonomous over time might mean an original inside determination no longer reflects reality months later. Clients aren't always proactive about catching this, so it's worth watching your own working practices rather than assuming the original SDS still applies indefinitely.

Common Process Mistakes

• Blanket determinations — assessing every contractor in a role as automatically inside or outside, without looking at each engagement individually, is unlawful.
• Contracts that don't match reality — a strong substitution clause means little if actual practice contradicts it.
• Skipping or delaying the SDS — clients must provide one before or shortly after the engagement starts, not months in.
• Treating CEST as the final word — it's a starting point, not a substitute for proper review on anything borderline. Our full breakdown of inside vs outside IR35 covers what's financially at stake if this gets misjudged.

How a Contractor Accountant Helps

Much of this process runs quietly in the background until something doesn't add up. A specialist contractor accountant can review your contract before you sign it, check your actual working practices support the expected status, help build a case if you need to challenge an SDS, and flag when a mid-contract change should trigger a fresh look. Given the money on either side of a determination, that oversight is generally worth more than the cost of the review.

This guide reflects UK off-payroll working rules as they stood in July 2026. For a decision involving significant money, get a professional status review from a qualified contractor accountant rather than relying on any single article.

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