Understanding your IR35 status is important for IT contractors working through a limited company or personal service company. Whether an engagement falls inside or outside IR35 depends on the actual working relationship, not one factor alone. No single factor settles it on its own. It’s the overall picture that counts.
What Is IR35 Status for IT Contractors?
IR35 is tax legislation that targets contractors HMRC considers similar to employees. It applies even when they operate through their own limited company or personal service company (PSC).
If HMRC classifies an engagement as “inside IR35”, the income is broadly taxed in a similar way to employment income, rather than in the more tax-efficient way most contractors are set up for. “Outside IR35” means the contractor’s company can generally receive payment and pay tax as an independent business, as intended.
For IT contractors, this question comes up often because contracts can run for months. Contractors may also work within a client’s systems or premises, making their IR35 status harder to determine. That’s exactly why it helps to understand what HMRC and tribunals actually look at.
What Factors Affect IR35 Status for IT Contractors?
There’s no neat checklist that spits out a definitive answer, but a few areas keep coming up as relevant.
Substitution. Could the contractor genuinely send someone else to do the work instead of them? A substitution clause can be a relevant factor, but only if it’s a real, unrestricted right — one the client would actually go along with in practice. A clause in the contract that neither party would realistically use carries much less weight than one that either party can genuinely exercise.
Control. This is about who decides how, when and where the work happens. If the client’s dictating hours, methods and day-to-day direction in a way that looks a lot like managing an employee, that may indicate an inside-IR35 relationship. More freedom over how the work actually gets delivered tends to point the other way.
Mutuality of obligation (MOO). In plain terms: is there an ongoing expectation that the client will keep offering work and the contractor will keep accepting it, beyond what’s already agreed for the current project? MOO on its own doesn’t decide status — but whether that ongoing obligation exists is still one piece of the wider puzzle.
Other factors. HMRC and tribunals have also weighed things like financial risk, whether the contractor supplies their own equipment, whether they work for more than one client, and how embedded they are in the client’s organisation. None of these tips the balance alone — they all feed into the bigger assessment.
Why the Contract Isn’t the Whole Story
A well-written contract helps, but it’s not the final word. What HMRC really cares about is how the engagement works in reality — the actual working practices — not just what’s written on paper.
Say a contract includes a substitution clause and claims the contractor has full control over their methods, but in reality, the client closely directs the contractor, sets their working hours, and has never allowed them to send a substitute. In that situation, it’s the real working relationship that tends to count, not the wording.
That’s why it’s worth looking at the contract and the day-to-day reality of the engagement side by side, rather than assuming a well-drafted contract settles things by itself.
How Can IT Contractors Protect their IR35 Position?
A handful of practical steps can put you in a stronger, better-evidenced position:
- Actually read contracts before signing them, rather than assuming a standard template has you covered
- Check the contract reflects how the engagement will genuinely operate, not how you’d like it to look on paper
- Keep hold of evidence of working practices — emails, correspondence, examples of autonomy or substitution — in case your position is ever questioned
- Revisit your IR35 assessment if the engagement changes, since a shift in working practices can shift the picture too
- Get professional advice when things aren’t clear-cut, particularly on longer contracts or ones where you’re closely embedded with the client
This isn’t something worth guessing at — getting it wrong can have real financial consequences. It’s an area the team at Magnum Accountancy regularly helps IT contractors work through, looking at both the contract and the working practices together so you end up with a clearer, better-evidenced position either way.
If you’re not sure where a particular engagement stands, it’s worth talking it through with someone who understands the detail rather than relying on assumptions.
Book a free 30-minute call with Daxa at Magnum Accountancy. /book-a-free-call/
