Contracting Outside IR35: Building a Defensible Position

Why a defensible position matters more than a confident one

Plenty of contractors hold outside IR35 determinations that would not survive contact with an HMRC enquiry. The determination itself, whether issued by a client under the off-payroll rules or reached by the contractor under Chapter 8, is a conclusion. What HMRC tests is the evidence underneath it. If the written contract says one thing and the working reality says another, tribunals look at the reality. That principle has run through status case law since Ready Mixed Concrete in 1968, and the Supreme Court restated the framework as recently as PGMOL in 2024.

Building a defensible position therefore means assembling evidence on three levels at once: the contractual terms, the working practices that play out day to day, and the wider picture of whether you are in business on your own account. Each level needs to support the other two. A perfect contract sitting on top of employee-like behaviour is worth very little, and the Court of Appeal's decision in Atholl House confirmed that the whole picture, including how the worker carries on business generally, feeds into the final judgment.

The contract clauses that carry real weight

Status is decided on the hypothetical contract between the worker and the client, so the written terms are the natural starting point. Four areas matter far more than the rest. The employment status tests behind them are covered in detail in a separate guide, but here is what each clause needs to do.

A genuine right of substitution

Personal service is the hallmark of employment. A clause giving the contractor an unfettered right to send a suitably qualified substitute, at the contractor's own cost, directly attacks that hallmark. The right must be real rather than decorative. A clause the client could veto for any reason, or one that nobody on either side believes would ever be used, adds little. The strongest evidence is a substitution that actually happened, but a clause both parties acknowledge as workable still helps.

No mutuality of obligation between assignments

The contract should make clear that the client has no obligation to offer further work when the current piece ends, and that the contractor has no obligation to accept any that is offered. PGMOL narrowed how far mutuality arguments can carry a worker on their own, since some mutuality exists in almost any contract, but the absence of any continuing obligation between engagements still distinguishes a contractor from a retained employee. Spell it out and then behave accordingly: gaps between contracts, declined extensions and concurrent work all reinforce it.

Control over how the work is done

A client can legitimately specify what outcome it wants, when it needs it and where security or site rules require the work to happen. What it should not control is the method. The contract should state that the contractor determines how the services are delivered, is not subject to supervision, direction or control over working methods, and is not required to follow internal staff procedures beyond those that apply to any visitor, such as health and safety or data security.

Project deliverables rather than a role

Contracts that describe a defined piece of work, with deliverables, milestones and an end point, read like business-to-business agreements. Contracts that describe a job title, a reporting line and an open-ended commitment to provide services as required read like employment. The schedule should name the project, list the deliverables and avoid language such as line manager, probation, appraisal or any entitlement that mirrors staff benefits.

Working practices: the contract is only the opening statement

HMRC officers and tribunals routinely set the written terms aside where the facts on the ground diverge from them. Day-to-day independence is what converts a well-drafted contract into a defensible position. In practice that means a recognisable pattern of behaviour over the life of the engagement.

• Decide your own working methods and push back, politely and in writing, if a client tries to direct how rather than what.
• Set your own hours within the project's deadlines instead of mirroring staff core hours, and do not book holiday through the client's HR system.
• Stay out of staff structures: no appearance on internal org charts, no staff appraisals, no line management of employees, no attendance at all-hands meetings that have nothing to do with your project.
• Skip staff benefits entirely, including subsidised canteens, social budgets, training paid for by the client and Christmas parties funded as a staff event.
• Use your own equipment where the client's security policy allows it, and where it does not, record why client kit was mandated.
• Invoice against deliverables or agreed milestones, query scope changes commercially, and quote separately for work outside the original schedule.

Keep contemporaneous records of all of this. Emails declining out-of-scope requests, calendar evidence of working from your own office, and invoices that reference deliverables are exactly the documents that decide enquiries years later, when memories have faded and the project team has moved on.

Looking like a business, not a worker with a company wrapper

Atholl House pushed the in-business-on-your-own-account question up the agenda. Beyond the individual engagement, HMRC and the courts ask whether the person carries on a genuine business. A limited company with one client, no marketing and no financial risk looks like a payroll arrangement with extra paperwork. The indicators that move the dial are mostly cheap to put in place and expensive to fake retrospectively.

• Multiple clients over time, and ideally some concurrent income, even if one engagement dominates in any given year.
• Visible marketing: a company website, a professional profile that advertises services rather than seeks a role, and evidence of pitching or tendering for work.
• Your own equipment, software licences and insurance, including professional indemnity cover, paid for by the company.
• Genuine financial risk: fixed-price elements, payment tied to acceptance of deliverables, and bad debt exposure that an employee never faces.
• Rectification of defective work in your own time and at your own cost, written into the contract and honoured in practice.
• Business overheads such as training you fund yourself, accountancy fees and subcontractor costs.

None of these is decisive alone. Together they answer the question a tribunal will eventually ask: if this engagement disappeared tomorrow, would there still be a business here?

Statements of work versus time and materials

How the commercial deal is structured shapes the status picture. A time-and-materials arrangement, billed by the day with no defined output, is not fatal to an outside position, but it gives HMRC an easy line of attack: paid for time, like an employee. A statement of work flips that. The SoW defines deliverables, acceptance criteria, milestones and a price, and payment follows output rather than attendance.

Two cautions apply. First, a statement of work only helps if it is genuine. Relabelling a body-shopping arrangement as an SoW while the contractor continues to fill a seat five days a week changes nothing, and HMRC has said repeatedly that contrived SoW models do not move the supply chain's obligations. Second, where an agency or consultancy sits in the chain and claims to be the client because it has taken on a fully contracted-out service, that claim needs to be true, otherwise the determination responsibility sits where it always did. If a day-rate structure is commercially unavoidable, compensate with strong deliverable language in the schedule, milestone reviews and acceptance sign-offs.

Length of engagement deserves a mention here too. There is no statutory time limit on an outside contract, and a two-year engagement can be sounder than a six-month one if the evidence holds. What long engagements do is raise the part-and-parcel risk: the longer you sit with one client, the easier it becomes for HMRC to argue you have been absorbed into the organisation. Counter it deliberately. Renew against a fresh statement of work rather than rolling the same terms forward, take on at least some work for other clients during the engagement, and make sure each extension is a commercial decision with its own paperwork rather than an assumed continuation.

Confirmation of arrangements: get the client's signature on reality

A confirmation of arrangements letter is a short document, signed by someone at the client with direct knowledge of the engagement, confirming how the work actually operates: that substitution would be accepted, that the contractor controls method, that no further work is promised, that the contractor is not part of the staff structure. It is one of the most persuasive documents you can hold in an enquiry, because it is the client's own evidence, created at the time, rather than the contractor's recollection under pressure.

Ask the project sponsor or engagement manager to sign it, not just the agency, since the agency rarely has first-hand knowledge of working practices. Refresh it whenever the engagement is extended or the scope changes materially. If a client refuses to sign one, that refusal is itself useful information about how defensible the position really is. Where the client has issued a status determination statement, check that the letter and the SDS tell the same story, and remember that the SDS disagreement process gives the client 45 days to respond if you challenge a determination you believe is wrong.

Keep the position current with an annual status review

Status is assessed engagement by engagement, and engagements drift. A contract that started as a defined migration project can quietly become business-as-usual support. A new programme manager can start treating contractors as team members. An extension signed in a hurry can drop the substitution clause the original contract contained. Any of these turns a sound position into a weak one without anyone making a deliberate decision.

An annual review, and a fresh review at every extension or material scope change, keeps the evidence aligned with reality. It should re-test the contract terms, re-test the working practices against what is actually happening, refresh the confirmation of arrangements, and file the lot. An independent contract and working practices review carries more weight in an enquiry than a self-assessment, because it shows reasonable care and gives HMRC a professional opinion to engage with rather than just the taxpayer's own view.

What changed in your favour from 6 April 2026

From 6 April 2026 the company size thresholds that decide who applies the off-payroll working rules rose to £15 million turnover and £7.5 million balance sheet total, with the 50-employee limit unchanged. A significant band of medium-sized clients reclassified as small as a result. For engagements with a small client, Chapter 8 of Part 2 ITEPA 2003 applies instead of Chapter 10: the PSC, not the client, determines status, and the PSC carries the liability if the determination is wrong.

For a contractor with genuinely independent working practices, this is a meaningful improvement. You are no longer hostage to a client's blanket inside determination made to protect its own position. You assess the engagement yourself, on its real facts, using the case law tests and tools such as HMRC's CEST tool if helpful, while remembering CEST can return an undetermined result. The flip side is that the risk now sits with your company, so the evidence standards described in this guide stop being good practice and become your own liability protection. The mechanics of the threshold change, including the transition rules and how to confirm a client's size, are covered in the guide to the small company threshold change.

Putting it together

A defensible outside IR35 position is a file, not a feeling. The file contains a contract whose substitution, mutuality, control and deliverables clauses would survive scrutiny, working-practice evidence that matches those clauses, business indicators that answer the in-business question, a signed confirmation of arrangements, and a dated independent review repeated at least annually. Contractors who hold that file rarely lose enquiries, and many enquiries close at the first exchange of correspondence because the evidence is already assembled. A specialist accountant can build and maintain that file with you, review each new contract before signature, and act as the first line of defence if HMRC ever opens an enquiry.