Why Your IR35 Contract Doesn't Guarantee Outside Status

You've paid a solicitor £800 for a perfectly drafted IR35-compliant contract. It's got substitution clauses, limited control provisions, and clear statements about self-employment. You're convinced you're outside IR35.Then HMRC investigates and determines you're inside. Your expensive contract is worthless. How did that happen?

Simple. HMRC doesn't care what your contract says if your actual working practices tell a different story. You can have the best contract in the world, but if you're working like an employee, you'll be taxed like one.

This is the single most misunderstood aspect of IR35. Contractors think contracts determine status. They don't. Contracts are evidence of intent, nothing more. What determines your IR35 status is how you actually work, day after day, throughout the contract period. Understanding the difference between contractual terms and established working practices could save you tens of thousands in disputed tax. Ignoring it could cost you the same.

Why Working Practices Trump Contracts

IR35 legislation doesn't ask "what does the contract say?" It asks "if this contract didn't exist, what would the employment relationship be?"

To answer that question, HMRC looks at the reality of your working arrangements. Not the legal fiction created by carefully worded clauses, but the practical day-to-day relationship between you and the client.

This approach exists because contracts can lie. A client wanting to engage contractors rather than employees might sign contracts full of self-employment language while treating those contractors exactly like staff. HMRC isn't interested in that charade.

The technical term is "established working practices" and it appears repeatedly in tribunal cases. Judges consistently rule that when contracts and reality diverge, reality wins.

The legal basis

IR35 legislation specifically states that tribunals should look at "the actual terms and circumstances of the engagement." Not just the written terms, but the circumstances. How things actually work.

Case law reinforces this. In multiple landmark cases, contractors have lost appeals despite having contracts that appeared to place them outside IR35. The working practices revealed the truth.

Courts have ruled that contractual terms can be "disregarded" if they don't reflect reality. If your contract says you can send a substitute but everyone involved knows you never would and the client would refuse, that clause gets ignored.

What HMRC Actually Investigates

When HMRC opens an IR35 investigation, they're not interested in reading your contract and ticking boxes. They want evidence of how you actually worked.

• They'll request emails between you and the client. These show who's directing work, who's making decisions, how requests are phrased, and the true power dynamic.
• They'll ask for timesheets or records of when you worked. These reveal if you were working set hours like an employee or flexible hours like a business owner.
• They'll want to see invoices and payment records. Do you invoice for time worked or deliverables completed? Do you get paid the same amount every month like salary, or does it vary with actual work done?
• They'll look at where you worked. If you were at the client's site every day using their equipment, that contradicts claims of independence regardless of what the contract says.
• They might interview you. They'll ask about your typical working day, who you reported to, how work was assigned, if you ever declined work, how decisions were made. Your answers reveal the truth about the working relationship.
• They'll potentially interview the client's staff. What these people say about your role, your integration into the team, and how they viewed you matters enormously.

Documentation that reveals the truth

Meeting invites showing you in regular team meetings. Your name on internal distribution lists. Company email addresses issued to you. Access to company systems. Performance reviews. Team organizational charts showing where you fit.

All of this demonstrates how you were actually treated, not how the contract pretended you'd be treated.

Project management software showing tasks assigned to you, deadlines imposed, and supervision of your work. Slack or Teams messages showing day-to-day direction and control.

Evidence of you following company procedures, using company templates, attending mandatory training, participating in team social events.

None of this appears in your contract. All of it reveals the real working relationship.

Common Gaps Between Contracts and Reality

Substitution rights:

Your contract states you can provide a substitute at any time without client approval. That's great on paper.

In reality, you've worked for this client for eighteen months and never mentioned substitution. The client's staff all know you personally. You're embedded in a specific project that only you understand. The idea of sending someone else is absurd and everyone knows it.

HMRC will disregard the substitution clause. It's not a genuine right if it's completely divorced from reality.

Control over working methods

Your contract says you have complete autonomy over how you deliver the work. You're engaged for results, not time.

In reality, you attend daily stand-up meetings where your manager assigns tasks. You use the client's project management software where someone tracks your progress. You follow their coding standards, their design guidelines, their approval processes. When you suggest a different approach, you're told to do it their way.

That's control. The contract clause saying you're autonomous is fiction.

Working hours and location

Your contract says you can work whenever and wherever you choose as long as deliverables are met.

In reality, you're expected at the client's office from 9am to 5pm. You've asked about working from home and been told everyone needs to be in the office for collaboration. When you mentioned starting later one day, you were told core hours are mandatory.

You don't have flexibility over when and where you work. You're working employee hours at an employee location.

Multiple clients

Your contract acknowledges you work for other clients and have no exclusivity requirement.

In reality, you're working 40+ hours a week for this one client. You haven't had time to take other work in the past year. When another opportunity came up, this client made it clear they expected you available full-time.

You're economically dependent on one client despite the non-exclusivity clause.

Financial risk

Your contract states you bear financial risk and can make a loss on the engagement.

In reality, you invoice for every hour worked at an agreed day rate. There's no output risk. You can't make a loss because you're paid for time regardless of results. If the project overruns, you earn more, not less.

There's no genuine financial risk beyond any self-employed person's general business risk.

Why Contractors End Up With This Mismatch

Most contractors don't deliberately create false contracts. The mismatch happens for legitimate reasons.

The contract was written before work started

You negotiated a contract that genuinely reflected your intended working relationship. Substitution was a real possibility. Autonomy was genuinely offered. Flexibility was on the table.

Then work actually started. The project was more complex than expected. The client needed more hands-on involvement. You got pulled into team processes. Gradually, the reality diverged from the contract.

Six months in, you're working like an employee but the contract hasn't changed.

The client's practices apply to everyone

You negotiated good contract terms, but when you started work, you discovered all contractors at this client follow the same working practices as employees. You're expected at team meetings. You follow their procedures. You work their hours.

You didn't negotiate for this, but refusing to participate would mark you as difficult. So you comply, and the working practices don't match your contract.

You didn't understand the difference

Many contractors think having the right words in a contract is sufficient. They don't realize those words must reflect actual practice. So they sign a contract with substitution rights they never intend to use, autonomy clauses that don't reflect how they'll actually work, and flexibility provisions that aren't real.

The client wanted contractor terms but employee practices

Some clients deliberately structure contracts to look like self-employment while treating contractors like staff. It's not always malicious. Sometimes they genuinely don't understand the distinction. Sometimes they want the flexibility of contractors without the administrative burden of ensuring working practices match.

What Happens When HMRC Finds the Mismatch

If HMRC investigates and discovers your working practices contradict your contract, they'll assess you based on the working practices. The contract gets minimal weight.

This means you'll be determined inside IR35 even though your contract suggested you were outside. You'll face a tax bill for the difference between what you paid and what you should have paid.

That bill includes the tax itself plus interest for late payment. If HMRC decides you were careless or deliberate in the misrepresentation, penalties get added on top. These can reach 100% of the tax owed in serious cases.

In tribunal cases

If you appeal and the case reaches tribunal, judges will examine evidence of your actual working practices in detail. Your contract gets presented as evidence, but so do emails, timesheets, witness statements, and records of how you actually worked.

Tribunals consistently rule that reality beats contracts. You can find dozens of cases where contractors lost appeals despite having contracts that looked compliant.

The judge wants to understand the true nature of the relationship. Did you genuinely operate as a business providing services? Or were you essentially an employee with a different label?

Evidence That Supports Your Contract

If you want your contract to carry weight in an IR35 assessment, you need evidence that its terms reflect reality.

For substitution rights

Records of conversations with the client about substitution. Details of who your substitute would be. Evidence that the client understands and accepts the substitution right. If you've ever used a substitute, documentation of that.

Even if you never send a substitute, evidence that you've identified someone capable, discussed the process with the client, and established the logistics makes the right genuine rather than theoretical.

For control

Emails showing you making decisions about how to approach work. Records of you declining to follow client suggestions and choosing your own methods. Evidence that you set your own schedule without needing approval.

Documentation of using your own tools, processes, and approaches rather than being required to follow client procedures.

For flexibility

Records showing varied working hours and locations. Emails confirming you're working from home or adjusting your schedule without needing permission. Evidence that you're judged on deliverables, not attendance.

If you take days off without requesting approval or work unusual hours because it suits you, evidence of that supports contractual flexibility clauses.

For multiple clients

Invoices from other clients during the same period. Evidence of business development activities. Marketing materials, website, LinkedIn activity showing you as an active business seeking multiple clients.

This demonstrates you're not economically dependent on one client despite spending significant time there.

Aligning Your Contract With Reality

The goal isn't to create a false contract. It's to ensure your contract accurately reflects how you actually work.

Before finalizing a contract, think hard about the reality of the engagement. Will you genuinely have the rights and flexibilities the contract describes? If not, don't include clauses that sound good but aren't real.

Be honest about control

If the client needs to direct your work because of the nature of the project, your contract should reflect that. Don't include sweeping autonomy clauses if you know you'll be taking day-to-day instructions.

You might still be outside IR35 if other factors are strong, but at least your contract won't contradict reality.

Make substitution real

If you include substitution rights, make them practical. Identify someone who could substitute for you. Discuss this with the client at the start. Make it clear you might exercise this right.

Even if you never actually send a substitute, having a genuine capability to do so makes the right real rather than theoretical.

Reflect actual flexibility

Don't say you can work whenever and wherever you choose if the client expects you on-site during business hours. Instead, describe the actual arrangement. Maybe you can work from home two days a week, or you can adjust your start and finish times within certain parameters.

Accurate description of partial flexibility is better than claiming complete flexibility that doesn't exist.

Document changes

If the working relationship evolves during the contract, update the contract. If you initially had autonomy but the client now needs more involvement, formally vary the contract to reflect the change.

This shows both parties understood how the relationship was developing and agreed to it, rather than the contract becoming gradually meaningless.

What To Do If They Don't Match

If you discover your working practices don't match your contract, you've got two options: change the contract or change the practices.

Changing the contract

If your working practices are genuinely self-employed but your contract undersells this, update the contract to better reflect reality. Add details about how you actually work that demonstrate autonomy, substitution capability, and genuine business-to-business relationships.

Make sure the updated contract describes what's actually happening, not what you wish was happening.

Changing the practices

If your contract claims you're self-employed but you're working like an employee, you need to change how you work. Negotiate more autonomy. Exercise the rights your contract gives you. Work in ways that demonstrate genuine self-employment.

This might mean pushing back on client expectations. Having conversations about flexibility. Documenting your substitution rights and making them real. Working from home more. Setting your own schedule.

If the client won't accept changes that would make you genuinely self-employed, you need to acknowledge you're inside IR35 and adjust your tax position accordingly.

The Role of Status Determination Statements

Under the off-payroll working rules, medium and large clients must issue Status Determination Statements. These assess your IR35 status before work starts.

The SDS should consider your contract and your expected working practices together. A good determination looks at both and identifies any mismatches.

If the client determines you're inside IR35 based on expected working practices, having a contract that suggests you're outside doesn't help. The determination accounts for reality, not just contract terms.

If you disagree with the determination, your challenge should focus on demonstrating that your actual working practices support outside IR35 status. Simply pointing to contract clauses won't be enough.

Building Evidence Throughout Your Contract

Smart contractors build evidence of their working practices throughout the engagement. Don't wait for an investigation to try proving how you worked.

Keep records

Save emails showing decision-making autonomy. Document times you worked flexibly or declined work. Keep evidence of using your own equipment and methods. Record conversations about substitution or other self-employment factors.

These records prove the contract terms reflected reality.

Be consistent

If your contract says you're autonomous, don't then send emails asking permission for everything. If you have substitution rights, don't refer to yourself as "the only person who can do this work."

Your communications should reinforce your self-employed status, not undermine it.

Document the relationship

When you exercise contract rights, document it. When you work in ways that demonstrate self-employment, keep records. When the client respects your autonomy, note it.

This creates a contemporaneous record of working practices that supports your IR35 position.

When Professional Review Helps

If you're unsure about the gap between your contract and your working practices, professional IR35 review is valuable. A specialist can identify mismatches you've missed.

They'll review your contract, ask detailed questions about how you actually work, and identify areas of concern. They can suggest either contract changes or working practice adjustments to close any gaps.

This review should happen before you start work if possible, or early in the engagement. Don't wait until HMRC investigates to discover your contract and reality don't align.

The Key Point

Contracts matter. They're evidence of what both parties intended and agreed. But they're not the final word on IR35 status.Your actual working practices determine your status. If those practices align with your contract's terms, the contract supports your position. If they don't, the contract is largely irrelevant and might actually hurt you by showing you knew the proper arrangement but ignored it.

Focus on reality. Make your contract reflect that reality accurately. Build evidence that your working practices match your contract. That's how you create a defensible IR35 position that survives scrutiny.

Anything less is hoping HMRC never investigates. That's not a strategy. That's a gamble with your financial future at stake.