IR35 Status Determination Explained: How Your Status Is Decided

If you contract through your own limited company, or you’re thinking about it, IR35 is the rule that decides how much of your money you keep. In plain English, it’s tax legislation that tests whether you’re genuinely running a business, or whether you’re really an employee in disguise who should be taxed like one. Every contract you take on gets that test, and the answer puts it inside IR35 (taxed like a job) or outside IR35 (taxed as a business).

That test is your IR35 assessment, and this guide explains how it’s actually made: who decides, what they look at, how HMRC’s CEST tool fits in, what a status determination statement is, and what you can do if you disagree with the result. For the rules themselves, start with our complete IR35 guide.

What is an IR35 status determination?

An IR35 status determination is the assessment of one specific contract to decide whether the off-payroll working rules apply to it. People call it an IR35 assessment, an IR35 check or simply “your IR35 status”, and they all mean the same thing.

Whoever carries it out is answering one question: if the intermediary (usually your limited company) weren’t there and the client engaged you directly, would you be an employee for tax purposes?

Three things follow:

• It’s contract by contract. Status isn’t a badge you hold. You can be outside IR35 on one engagement and inside on the next, and each one stands on its own facts.
• It’s about the real relationship. The written contract matters, but so does how you actually work day to day.
• It’s a judgement, not a calculation. There’s no points score; several factors are weighed together.

So who is that person that decides your ir35 status?

Who decides your IR35 status?

Since April 2021, the answer is set by the size and type of your client (see the off-payroll working rules for the legislation background).

• Public sector bodies, and medium or large private-sector clients: the client is responsible for deciding your status and should set out its conclusion, with reasons, in a status determination statement (gov.uk: understanding off-payroll working).
• Small private-sector clients: the responsibility stays with you and your intermediary (your limited company), and your company carries the consequences if the decision is wrong (gov.uk: understanding off-payroll working).

A client counts as small if it meets at least two of these Companies Act tests (HMRC ESM10006):

• Annual turnover: £15 million or less.
• Balance sheet total: £7.5 million or less.
• Employees: 50 or fewer.

Most IT contractors work through an agency, sometimes a chain of them. That doesn’t move the decision: the end client still assesses your status, and its statement is passed down the chain to whoever pays your company (the fee-payer) and to you. If the client fails to pass it on, responsibility for the tax stays with the client (HMRC ESM10011).

One more twist. The client-decides rules only apply where the client is a public authority, or is medium or large and has a UK connection, meaning it is UK resident or has a permanent establishment here (ITEPA 2003 s61K). If your client is wholly overseas with no UK presence, the decision comes back to you, as it does with a small client.

In short: a UK-based medium or large client decides for you; a small or wholly overseas client leaves it with you. Either way, the assessment is made the same way. First, though, the document that records it.

What is a Status Determination Statement (SDS)?

A status determination statement is the client’s written record of its IR35 decision for your engagement. To be valid it has to do three things (HMRC ESM10013, ITEPA 2003 Part 2 Chapter 10):

• State the conclusion: whether you would be an employee for tax if the client engaged you directly.
• Give the reasons for reaching that conclusion.
• Show reasonable care was taken in reaching it.

If the statement fails any of the three tests it isn’t a valid SDS, and responsibility for deducting tax and National Insurance rests with the client rather than moving down the chain (HMRC ESM10013). That is the mechanism that makes clients take the process seriously: liability, not a freestanding legal duty to hand you a form.

So our line is a practical one. Your client should complete an SDS for every engagement it assesses, and we recommend you request a copy in writing before your first payment under the contract and keep it on file with the contract itself. Until an SDS exists, liability sits with the client; once you hold a valid one, you know exactly what has been decided and why.

Now to the substance: what is the client (or you) actually looking at?

Is it your contract or your working practices that decide it?

Both. And where they disagree, reality tends to win.

HMRC’s approach is to find out what happens in practice and compare it with the written terms. Where a term has been varied by agreement, or was never genuine in the first place, what actually happens determines status (HMRC ESM0510). In effect, HMRC and the tribunals build a picture of the true agreement from both sources together.

That has two consequences for you:

• A good clause you don’t use counts for little. A right of substitution that everyone knows would never be exercised won’t carry the weight the wording suggests.
• Blanket or role-based decisions look at neither. A client that puts a whole department inside without considering each contract, or how each person works, has skipped the very things the assessment is meant to examine.

Essentially, a determination is a judgement about how a real engagement works. The next section covers what that judgement is weighing.

What tests decide your IR35 status?

There’s no single test. HMRC’s guidance describes it as evaluating the overall picture that emerges from all the facts, not running through a checklist (HMRC ESM0515). Three factors carry the most weight; secondary factors fill in the rest (HMRC ESM0500).

Personal service and substitution

Personal service means the client requires you, specifically, to do the work. An employee can’t send someone else; a business can.

• A genuine right of substitution (you can send a suitably qualified replacement at your own cost, and the client can only refuse on reasonable grounds) points away from employment.
• A right that exists only on paper, or one the client can veto at will, adds little.

Control

Control is about who decides what work is done, and how, when and where it’s done.

• Client dictates method, hours and location: looks like employment.
• You’re engaged to deliver an outcome and decide your own approach: looks like a business engagement.
• Normal coordination (stand-ups, security policies, release windows) happens in either case; the question is who holds the right to direct the work itself.

Mutuality of obligation (MOO)

Mutuality of obligation asks whether the client is obliged to keep offering you work and you are obliged to accept it.

• An expectation of continuing work beyond the current deliverable, with pay whether or not there’s anything to do, points towards employment.
• A defined piece of work that ends when it’s done, with no obligation on either side after that, points away from it.

The whole picture

Beyond the big three, everything else that shows what kind of relationship this is gets weighed (HMRC ESM0500):

• Financial risk: you carry commercial risk. Markers: fixed-price or milestone quotes; putting right your own errors at your own cost.
• Equipment: you supply your own tools. Markers: your own laptop, software and licences where the client’s security policy allows it.
• Integration (“part and parcel”): you look like part of the client’s organisation. Markers that point towards employment: staff perks, a permanent pass, a place on the org chart, appraisals.
• In business on your own account: you operate as a business, not just a worker. Markers: other clients, business insurance, marketing and a business identity of your own.
• Intention of the parties: the contract states a business-to-business relationship. A minor factor that only tips things when everything else is balanced.
• Notice and termination terms: how the engagement ends. A long notice period or an open-ended arrangement looks like employment; ending on completion of the work looks like a business engagement.

None of these settles it alone, and how they weigh up depends on your specific circumstances. Want to strengthen these factors? See how to stay outside IR35.

How does HMRC’s CEST tool work?

CEST stands for Check Employment Status for Tax. It’s HMRC’s free online questionnaire, and anyone can use it: clients, agencies or you (gov.uk: check employment status for tax). It’s the closest thing to an “official IR35 check” that exists.

What it asks. CEST walks through the factors above in plain-English questions: whether you could send a substitute and who would pay them, who decides what, how, when and where the work is done, whether you carry financial risk, whether you receive corporate benefits or have management responsibilities, and whether you’re in business on your own account (HMRC ESM11000). Have the contract and a clear account of the working arrangements ready, because you can’t save progress part way through (gov.uk: check employment status for tax).

What it gives you. For an off-payroll engagement the result is either that the rules apply, that they don’t, or that CEST is unable to make a determination. When it can’t decide, the tool points you to further guidance and HMRC’s helpline (HMRC ESM11170). An undetermined result usually means the engagement is finely balanced and needs a proper look at the facts.

Where HMRC stands. HMRC will stand by a CEST result provided the information entered is accurate and the tool is used in line with its guidance. It won’t stand by results from contrived arrangements designed to produce a particular answer, and a result stops holding good if the arrangements change materially (HMRC ESM11010).

Always keep the output. CEST doesn’t store your answers or result, so download or print the PDF, which shows every answer and the reasoning (HMRC ESM11170). If your client used CEST, ask for their copy too.

One honest caveat: CEST is only as good as the answers put into it.

What does “reasonable care” mean in an IR35 assessment?

Reasonable care means the client acts as a prudent and reasonable person in its position would when reaching the determination (HMRC ESM10014). It’s what separates a valid SDS from an invalid one.

HMRC gives concrete examples (HMRC ESM10014):

• Considering each engagement individually, based on its own facts.
• Applying the status principles accurately and keeping a record of how the conclusion was reached.
• Completing CEST accurately and applying its result, where the client uses it.
• Reassessing when there’s a material change to your terms or working arrangements.

And what falls short: deciding that every contractor is inside IR35 without considering the specific facts of each case. That’s the “blanket determination”, and HMRC names it as a failure of reasonable care. Where several people do similar roles, each role’s determination still has to rest on its own facts rather than borrow the outcome from another.

What counts as reasonable also scales with the client’s abilities, experience and circumstances.

In short: reasonable care means someone actually looked at your engagement. If nobody did, the determination is on shaky ground, which is exactly where the next section comes in.

What if you disagree with your status determination?

You don’t have to accept an SDS you think is wrong. The rules give you a client-led process for challenging it.

• Make representations to the client. Set out, in writing, why you believe the conclusion is wrong, pointing to specific facts: the substitute you’ve sent, the way you control your own work, the outcome-based nature of the engagement. Evidence beats assertion.
• The client has to respond. It must either confirm the original statement with reasons or issue a new one, and it must respond within 45 days of receiving your representations (ITEPA 2003 s61T). Raise it before the final payment on the engagement, because the duty to respond only covers representations made before then (HMRC ESM10015A).
• Renegotiate for next time. If the decision stands, look at what tipped it; often it’s a specific term or practice that can change for the next engagement.

Whichever way it goes, you have options. Our guides to what being inside IR35 means and how to stay outside IR35 cover each side.

What happens after the determination?

The determination sets how you’re paid for that contract.

• Outside IR35: your company is paid gross, invoices as normal and runs its own tax affairs. Business as usual, with the evidence below kept on file.
• Inside IR35: tax and National Insurance are deducted before the money reaches you, through an umbrella, an agency payroll or a deemed payment to your company. Our guide to what being inside IR35 means walks through the routes and what they cost you, and our inside vs outside IR35 calculator shows the difference at your day rate.

For the two outcomes side by side, see inside vs outside IR35 compared. How much the difference is worth depends on your specific circumstances.

What evidence should you keep?

A determination is only as strong as the record behind it. Keep:

• The SDS itself, plus your written request for it and any correspondence about it.
• The CEST output, yours and, if you can get it, the client’s.
• The contracts, upper and lower, for the whole engagement.
• Contemporaneous emails showing how the work was actually done: the time you turned down extra work, sent a substitute, chose your own method, or fixed an error at your own cost. This is the item contractors most often lack, and the one that shows working practices rather than paperwork.
• Business insurance certificates, your own equipment invoices, and anything else showing you’re in business on your own account.

Keep it all for at least six years after the engagement ends, matching the rule for company records: six years from the end of the financial year they relate to, and longer if HMRC opens a compliance check (gov.uk: company and accounting records).

IR35 status determination FAQs

1. What is an IR35 assessment? The assessment of a single contract to decide whether the off-payroll working rules apply: would you be an employee for tax if the client engaged you directly? Medium and large UK clients make it; otherwise you do.
2. Is there an official IR35 check? HMRC’s CEST tool is the only official one. It’s free, anyone can use it, and it can return “unable to make a determination” for finely balanced engagements.
3. Is a CEST result legally binding? No. HMRC will stand by a result reached with accurate information and in line with its guidance, but not one from contrived arrangements, and a tribunal isn’t bound by it.
4. Who decides my IR35 status if my client is small? You do, through your limited company. The client-decides rules only apply to public sector bodies and medium or large clients with a UK connection.
5. What should I do if my client won’t share the status determination? Ask in writing and keep the request. The client should complete an SDS, and until a valid one exists the tax liability stays with the client. Keep your own records regardless.
6. Can HMRC overturn a status determination? HMRC can challenge a determination it disagrees with. Where the client decided, the enquiry is primarily with the client; where you decided, it’s with your company.
7. How often should my IR35 status be reassessed? At the start of every engagement, and whenever your terms or working practices change materially, such as a renewal with a different scope. HMRC treats reassessment on material change as part of reasonable care.
8. Does one determination cover all my contracts? No. Each engagement is assessed on its own facts; an outside result on one says nothing about the next.