IR35: what the four factors actually mean
A plain-English look at the four things HMRC weighs most heavily when deciding whether a contractor engagement should be taxed like employment (“inside IR35”) or like genuine self-employment (“outside IR35”) - the same four factors Agreemnt reads off your own contracts and shows on the “IR35 signals” card.
This is background reading, not advice, and not a determination. IR35 status depends on the whole working relationship, not just contract wording, and getting it wrong has real tax consequences for both sides. Use HMRC’s CEST tool or a professional adviser before relying on anything here.
Why this matters at all
IR35 (the “off-payroll working rules”) exists to stop a genuine employment relationship being dressed up as a contractor arrangement purely to save on tax and National Insurance. If a contractor working through their own limited company is, in substance, working like an employee, HMRC can treat the engagement as “inside IR35” - meaning tax and NI get deducted broadly as if they were on payroll, regardless of what the contract itself is titled.
For a small business engaging a contractor, this matters directly: for most medium and large private-sector clients, it’s the client who has to make the status determination and who can end up liable for the extra tax if they get it wrong. Reading the signals early, before a dispute or an HMRC enquiry, is the whole point.
Substitution - can they send someone else?
A genuine business-to-business arrangement usually lets the contractor send a suitably qualified substitute to do the work in their place - because what’s really being bought is an outcome, not a specific person’s labour. An employee, by contrast, has to turn up and do the work themselves; nobody else can stand in for them.
Unfettered right of substitution - the contractor can send someone else, no client approval needed - points away from employment. A right of substitution with conditions (client approval, only in narrow circumstances) is weaker evidence, and often gets discounted by HMRC if it’s never actually exercised in practice. A requirement that the named individual does the work personally, with no substitution allowed at all, points toward employment.
Control - who decides how, when, and where the work happens?
Employment usually comes with the client directing how the work gets done, not just what the end result should be - which hours, which methods, which tools, sometimes even which order tasks happen in. A genuine contractor is usually left to decide those things themselves, and is really only accountable for the outcome.
Low control (the contractor sets their own hours and methods, and is managed on deliverables rather than day-to-day activity) points away from employment. High control (told what to do, how to do it, and when, much like a member of staff would be) points toward it.
Mutuality of obligation - is there an ongoing expectation of work?
This one’s the least intuitive of the four. In an employment relationship, there’s an ongoing expectation: the employer is expected to keep offering work, and the employee is expected to accept it, for as long as the job continues. A genuine contractor engagement is usually for a defined piece of work - once it’s done, neither side owes the other anything further unless a fresh agreement is made.
A defined engagement with no obligation beyond it (a fixed project, a fixed term, nothing implied afterward) points away from employment. An open-ended, continuing expectation of further work - the contractor keeps getting offered new tasks with no real end point, much like an ongoing job - points toward it.
Exclusivity - are they free to work for other clients too?
A genuine contractor is usually free to take on other clients at the same time - that’s part of what makes them a business in their own right rather than someone whose time belongs to one employer. A restriction that stops them working for anyone else while the engagement runs looks a lot more like an employment relationship.
Free to take other clients, with no exclusivity clause, points away from employment. Restricted from working for others during the engagement points toward it.
How Agreemnt reads these signals
When a contract looks like a consultancy or contractor agreement with an individual working through their own company, Agreemnt reads the document’s own wording for these four factors and shows what it found on the contract’s own page - not a verdict, just the raw signals, plus a rough “which way do these lean” read based purely on how many factors point each way. If the document doesn’t address a factor at all, it’s shown as “not addressed” rather than guessed at.
If you know better than the document says - a substitution clause exists but nobody mentioned it in the extracted summary, say - you can correct any of the four factors by hand on the contract’s own page, and that correction sticks even if the contract is later reprocessed.
None of this is a real IR35 determination, and it isn’t meant to be treated as one. It’s a starting point for knowing what to look for before you check the real thing with HMRC’s CEST tool or a professional adviser.