The Three Key Tests to Determine IR35

Working out if you're inside or outside IR35 isn't about ticking boxes on a checklist. HMRC looks at the reality of your working relationship with a client, and they use three main tests to decide if you're genuinely self-employed or actually an employee in disguise.

Get this wrong and you're facing a tax bill that could run into tens of thousands. Get it right and you can legitimately operate outside IR35, paying less tax and keeping more of what you earn.

The three tests are control, substitution, and mutuality of obligation. They're not equally weighted, they're not always clear-cut, and sometimes the answer depends on small details in how you actually work rather than what your contract says.

Here's what each test means, what HMRC looks for, and how to honestly assess where you stand.

The Control Test. Who Decides How You Work?

Control is often the most important factor. HMRC wants to know who controls what you do, how you do it, when you do it, and where you do it.

Employees work under someone else's control. Their manager tells them what tasks to do, often how to do them, what hours to work, and where to work from. There's a clear hierarchy and the employee follows instructions.

Self-employed people control their own work. They might agree on the outcome or deliverable, but they decide the method, the schedule, and the approach. The client can't tell them to change how they work or insist they follow company procedures.

The question isn't whether your client gives you any guidance at all. Obviously they'll tell you what they want achieved. The question is whether they control how you achieve it.

What control looks like in practice:

If your client sets your working hours and expects you there 9 to 5, that's control pointing towards inside IR35. If you can work whatever hours suit you as long as the work gets done, that points outside.

If your client assigns you specific tasks daily and supervises how you complete them, that's employee-level control. If you're given a project objective and left to determine the best approach yourself, that's self-employed control.

If you must follow the client's processes, use their templates, attend their team meetings, and work the same way their employees do, HMRC sees control. If you work your own way using your own methods, you're demonstrating independence.

If you can decide to work from home some days without asking permission, or choose not to work on certain days and the client accepts that, you're exercising control over your working arrangements. If you need approval for these decisions, you're not.

The supervision question:

One element HMRC focuses on is supervision, direction and control. These three words appear repeatedly in IR35 case law because they capture the essence of employment.

Supervision means someone checking your work regularly and telling you to do it differently. Direction means someone telling you what to work on and when. Control means someone having the right to tell you how to do your job.

Employees experience all three. Genuinely self-employed contractors might accept direction about what to achieve, but they don't accept supervision of how they work or control over their methods.

Be honest with yourself here. If your client's staff are effectively managing you day to day, you're probably inside IR35 regardless of what your contract says.

The Substitution Test. Can Someone Else Do Your Job?

Substitution is simple in principle. If you can't do the work yourself, can you send someone else instead without needing the client's permission?

Employees can't do this. You can't just decide you don't fancy going to work today and send your mate instead. Your employer hired you specifically, and only you can fulfil that employment contract.

Self-employed people can do this. If you run a plumbing business and you're busy, you can send another qualified plumber from your team to do the job. The client hired your business for a service, not you personally.

For IR35 purposes, having a genuine right of substitution is strong evidence you're outside. If you genuinely can send a substitute and the client must accept them (assuming they're suitably qualified), that doesn't look like employment.

What genuine substitution means:

Your contract must explicitly allow substitution. Not just "may be allowed in exceptional circumstances," but a clear right to provide a substitute at your discretion.

You must actually be able to exercise this right. If the contract says substitution is allowed but in practice the client would refuse anyone you sent, it's not a genuine right. HMRC will look at whether substitution is realistic, not just theoretical.

You should bear the cost of the substitute. If you pay them from your own company funds, that's genuine substitution showing business risk. If the client pays the substitute directly at the same rate, that looks less like true substitution.

The substitute should have similar skills. You can't claim genuine substitution if your replacement would need three months of training first. The client should be getting an equivalent service.

The reality of substitution in contracting:

Most contractors never actually send a substitute. That's fine. HMRC accepts that the right of substitution can exist even if never used. What matters is whether you genuinely could send one if needed.

But "hypothetical" substitution clauses often fail scrutiny. If your contract says substitution is allowed but you've never discussed it with the client, have no one in mind who could do the work, and the client clearly expects you personally, HMRC won't accept it as genuine.

Some contractors think any substitution clause automatically puts them outside IR35. It doesn't. The right must be real, not just words in a contract that everyone knows will never be used.

When substitution doesn't help:

If the client specifically hired you for your personal skills, experience, or reputation, substitution becomes harder to argue. A design contractor hired because the client loved their previous work can't easily claim someone else could substitute.

If you're the only person who understands the systems or has the required clearances, practical substitution isn't possible even if the contract allows it.

If you've been working at the client for two years and are deeply embedded in their team, suggesting you could send a random substitute tomorrow isn't credible.

Mutuality of Obligation. The Ongoing Relationship Test

Mutuality of obligation is the most misunderstood of the three tests. It asks whether there's an ongoing obligation for the client to provide work and for you to accept it.

Employees have mutuality of obligation. The employer must provide work and pay the employee. The employee must turn up and do whatever work is assigned. It's an ongoing relationship with obligations on both sides.

Self-employed relationships typically don't have this. The client isn't obliged to offer more work once the current project finishes. You're not obliged to accept work they offer. Each piece of work is a separate transaction.

Inside the contract period:

During an active contract, there's always some mutuality. The client is paying you to provide services, you're obliged to provide them. That's just how contracts work.

What matters is whether this looks like an employment relationship or a commercial arrangement.

If the client can pull you off one project and assign you to something completely different, and you have to accept it, that's employment-level mutuality. If you're contracted for a specific piece of work and the client can't unilaterally change what you're doing, that's more like a commercial contract.

If you're paid regardless of whether there's work for you to do, that's employment. If you only invoice for work actually done, that's more commercial.

Between contracts:

The real mutuality test happens between engagements. Once your current contract ends, is there any expectation of more work?

If you and the client both expect the relationship to continue indefinitely, just renewing contracts as they expire, that suggests employment. If each contract is genuinely self-contained with no assumption of future work, that suggests self-employment.

Rolling contracts that automatically extend, or a series of back-to-back contracts with the same client lasting years, start to look like permanent employment dressed up as contracting.



The right to refuse work:

Can you say no if the client offers you work? Not just theoretically, but in practice?

Employees generally can't refuse work their employer assigns. Self-employed people can decline work they don't want to do.

If refusing work from your main client would effectively end the relationship and you both know it, you don't really have the right to refuse. If you regularly decline work or negotiate about what you'll take on, that demonstrates genuine independence.

How the Three Tests Work Together

HMRC doesn't score these tests and add them up. It's not "pass two out of three and you're outside IR35." They look at the whole picture of your working relationship.

You could pass the substitution test convincingly but fail on control, and still be inside IR35. You could have perfect mutuality of obligation evidence but if the client controls your daily work, you're probably inside.

Control tends to be the weightiest factor in most cases. If there's clear control by the client over how, when, and where you work, it's very difficult to argue you're outside IR35 even if you have substitution rights.

Strong substitution rights can sometimes overcome borderline control issues. If you genuinely could send someone else to do the work and the client must accept them, that's powerful evidence of self-employment even if there's some day-to-day direction.

Mutuality of obligation tends to be the tie-breaker when control and substitution are ambiguous. If the relationship looks and feels like ongoing employment, that pushes you inside. If it's clearly project-based and transactional, that helps keep you outside.

Other Factors HMRC Considers

The three main tests don't tell the whole story. HMRC looks at other factors that indicate whether you're truly in business on your own account.

Financial risk: Do you risk your own money? Do you have business expenses you can't reclaim? Could you make a loss on this contract? Employees don't face financial risk. Business owners do.

Provision of equipment: Are you using your own laptop, software, and tools? Or does the client provide everything? Using your own equipment suggests self-employment.

Basis of payment: Are you paid for results delivered or time worked? Payment for a defined deliverable suggests commercial work. Payment for hours worked suggests employment.

Exclusivity: Do you work for multiple clients? Employees typically work for one employer. Self-employed people often have multiple clients simultaneously.

Integration: Are you part of the client's organization, attending team meetings, using their email system, listed on their website? The more integrated you are, the more it looks like employment.

Intention: What did both parties intend when they entered the contract? This carries less weight than it used to, but it's still relevant. If both sides clearly intended a self-employed relationship and structured accordingly, that helps.

None of these factors alone determines your status. But they all contribute to the overall picture of whether you're genuinely self-employed or effectively an employee.

What Your Contract Says vs What Actually Happens

Here's something contractors often get wrong. They think a well-written contract guarantees they're outside IR35. It doesn't.

HMRC looks at how you actually work, not just what the contract says. If your contract says you have substitution rights but you've never exercised them and the client clearly expects you personally, HMRC will ignore the contract clause.

If your contract says you control your own working methods but in reality your client's project manager directs your work daily, HMRC will look at the reality.

If your contract says you're engaged for a specific project but you've been rolling the same contract for three years doing whatever work gets assigned, HMRC will see through that.

The technical term is "established working practices." What matters is what actually happens day to day, not what's written in the legal agreement.

This doesn't mean contracts are worthless. A well-drafted contract that accurately reflects genuinely self-employed working practices is essential. But it's the working practices that matter, with the contract as evidence of intent.

Honestly Assessing Your Own Status

The hardest part of IR35 assessment is being honest with yourself about your actual working arrangements.

Many contractors want to be outside IR35 because the tax is better. That desire can cloud judgment. You focus on the aspects of your contract that point outside and ignore the ones that point inside.

Try this exercise. Imagine explaining your working relationship to someone who knows nothing about your industry. Don't mention IR35 or tax. Just describe how you work.

Do you go to the client's office most days because that's where they expect you? Or do you choose to work there because it's convenient?

Do you work the hours you work because the client requires it, or because it suits your schedule?

Do you follow the client's processes because you must, or because you've chosen to align with their approach for this project?

When the client asks you to do something, can you say no? Have you ever said no? What would happen if you did?If someone asked your client's employees whether you're a contractor or one of the team, what would they say?The answers to these questions matter more than any clause in your contract.

When You're Borderline

Some working arrangements genuinely sit on the borderline. You have some control but not complete autonomy. You have substitution rights but they're not perfectly clear. There's some ongoing relationship but it's not obviously permanent.

In borderline cases, small details can tip you one way or the other.

If you're borderline and the financial consequences of being inside are significant, getting professional IR35 assessment is worth every penny. A specialist can spot the factors you've missed and advise whether your working practices need adjusting.

If you're borderline and your client has determined you inside, challenging it is difficult unless you can point to specific working practices that clearly demonstrate self-employment. Borderline cases rarely win appeals.

If you're borderline and making your own determination under the old rules or small company exemption, be conservative. HMRC doesn't give borderline cases the benefit of the doubt.

Making Changes to Move Outside IR35

If your assessment puts you inside IR35 but you believe you could legitimately operate outside with some changes, focus on the areas where you're weakest.

If control is the issue, negotiate more autonomy over how and when you work. Can you work from home more? Set your own schedule? Use your own methods rather than the client's?

If substitution is the problem, clarify your rights and identify someone who could genuinely substitute for you. Discuss it with the client so it's not just a theoretical contract clause.

If mutuality of obligation is keeping you inside, structure your contracts as fixed-term engagements for specific projects rather than ongoing relationships. Make clear there's no expectation of work beyond the current contract.

But don't make changes just on paper. The working practices must actually change. Rewriting your contract while continuing to work exactly the same way achieves nothing.

Determining your IR35 status comes down to three main questions. Does the client control how you work? Can you send a substitute? Is there an ongoing obligation on both sides?

Your answers need to reflect reality, not wishful thinking or creative contract drafting.

If the client controls your day-to-day work, you can't send anyone else to do it, and you're in an ongoing relationship that looks permanent, you're inside IR35. The tax treatment follows the reality of employment.

If you genuinely control your working methods, have real substitution rights, and work on a project-by-project basis, you're probably outside IR35. You're running a business providing services.

Most contractors don't sit at the extremes. You're somewhere in the middle, and working out which side of the line you fall needs honest assessment of all the factors together.

Get specialist advice if you're uncertain. The cost of getting IR35 wrong is substantially higher than the cost of proper professional assessment.