IR35 contracts: the clauses that determine your status.

1. Why your contract is what HMRC examines first

When HMRC investigates an IR35 status, the contract is the first document requested. It is not the only thing examined — actual working arrangements matter too — but the contract sets the baseline. A contract that does not contain the right language cannot support an outside-IR35 determination regardless of how the engagement operates in practice.

The relevant legislation is Chapter 10 ITEPA 2003 (off-payroll working rules), which extended to the private sector in April 2021. Under these rules, medium and large engagers must issue a Status Determination Statement before the engagement begins. HMRC applies three status tests: substitution, mutuality of obligation, and control. Your contract must address all three explicitly.

2. Right of substitution — the most important IR35 clause

A genuine right of substitution is the single most powerful indicator of outside-IR35 status. HMRC's view: if a worker can send a suitably qualified substitute rather than performing the work personally, the engagement looks like a business-to-business relationship, not employment.

The key word is genuine. A substitution clause that says the client can approve or refuse any substitute at their discretion is not genuine — it is a veto in disguise. Courts and HMRC have been clear: the client's right to refuse a substitute must be limited to competency grounds only (the substitute lacks the relevant skills or qualifications), not personal preference.

Check your current contract: if it says "subject to client approval" without limiting the grounds for refusal, the substitution right is not genuine and provides no IR35 protection.

3. Mutuality of obligation — how to exclude it in writing

Mutuality of obligation (MOO) is the test that asks: is the engager obliged to offer work, and is the worker obliged to accept it? In an employment relationship, both sides have ongoing obligations — the employer must provide work, the employee must show up. In a genuine B2B engagement, neither party has these obligations.

Most generic services agreements say nothing about mutuality of obligation. They imply it by their structure (ongoing retainer, fixed hours, rolling engagement). An IR35-compliant contract must explicitly state that neither party is obligated to offer or accept further work beyond the specific scope of the current agreement.

4. Control — evidencing PSC autonomy

The control test asks: does the engager control how, when, and where the services are delivered? An employee is controlled — their employer can direct their working methods, hours, and location. A contractor running a PSC is not under the same control: they determine their method, set their own hours within agreed deadlines, and choose their working location.

Your contract must reflect this. Phrases like "the contractor shall work such hours as the client requires" or "the contractor shall attend the client's premises daily" indicate employment-level control. IR35-compliant language emphasises deliverables, not attendance, and method autonomy, not instruction-following.

5. Financial risk — clauses that demonstrate a business

A genuine business bears financial risk: the risk of non-payment for poor work, the cost of correcting defects, the risk of not finding clients. An employee does not bear these risks — they are paid regardless.

Your contract should reflect real financial risk: a defects correction clause (the PSC is obligated to remedy errors at its own cost, not paid extra to do so), a warranty clause on the quality of deliverables, and liability for professional indemnity. If your current contract has no consequences for the PSC if the deliverables are poor, HMRC may conclude there is no genuine business risk.

6. The Status Determination Statement (SDS) clause

Under Chapter 10 ITEPA 2003, medium and large engagers must issue a Status Determination Statement before the engagement begins. The SDS must state whether the engagement is inside or outside IR35, give reasons for the determination, and be provided to the PSC before the start date.

Most contractors do not include an SDS clause in their contract. This is a mistake: without it, there is no contractual obligation on the engager to issue the SDS, no deadline by which it must be provided, and no remedy if it is not provided or is incorrectly determined.

7. IR35 Services Agreement vs freelance contract — the difference

A standard freelance contract protects deliverables, IP, and payment. It does not address IR35. It will not contain a substitution clause, no-MOO language, an SDS provision, or explicit control clauses. For a sole trader freelancer not operating through a PSC, this is appropriate — IR35 does not apply.

For a contractor operating through a Personal Service Company, an IR35 Services Agreement is the correct document. It covers everything a freelance contract covers, plus all six of the IR35-specific clauses above. Using a generic freelance contract for a PSC engagement leaves the contractor unprotected and the outside-IR35 determination unsupported.

Frequently asked questions