IR35 for fractional executives

IR35 for fractional executives — the three tests HMRC applies.

IR35 status turns on how the work is actually done, not on the contract's label. This guide explains the three tests HMRC looks at — and what you (as the engager) need to do, because a medium or large client makes the status determination. This is a guide, not legal advice.

Practice

Status turns on · how the work is actually done

The client

Who decides status · if medium or large

HMRC — off-payroll working guidance

Genuine

Substitution right · contractor can substitute

Contractor-led

Direction & control · deliverable not process

The three tests.

IR35 is the UK tax legislation that determines whether a contractor is genuinely self-employed (outside IR35, taxed as a business) or a disguised employee (inside IR35, taxed as PAYE). Three tests dominate the assessment.

For medium and large clients the rules sit in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003; HMRC's overview is Understanding off-payroll working (IR35).

Test 1 — Right of substitution

A genuinely self-employed contractor must be able to send a qualified substitute to deliver the engagement.

Not "we'd need to discuss it" — a genuine, unfettered right to substitute.

HMRC's manual on personal service says it is the right to send a substitute that matters, not whether it is used — and an unlimited veto on substitutes may mean the right is not genuine.

Test 2 — Control over how the work is done

The engager (you) specifies WHAT — the contractor specifies HOW. Outside IR35 means the contractor controls working hours, working location, and methodology.

They're not on your timesheet, they're not reporting to a line manager, they're not subject to your internal HR processes.

Inside IR35 looks like an employee in everything but the contract.

HMRC's guidance on control over what the worker does draws the line the same way: a contractor engaged for a specific task who cannot be moved to other work is not under that control.

Test 3 — Mutuality of obligation (MOO)

No obligation on you to offer ongoing work, no obligation on the contractor to accept it. An engagement is scoped to specific deliverables and a defined timeframe — when the mandate ends, the relationship ends.

There's no presumption of continuing employment, no notice period, no severance.

In HMRC's manual, mutuality of obligation decides whether there is a contract at all; on its own it does not settle which kind.

What the contract should set out

Scope of work with named deliverables, a fixed engagement period, the substitution and control terms as they will actually operate, and invoicing via the contractor's [limited company](https://www.gov.uk/limited-company-formation). A CEST check — HMRC's own employment-status tool — before signing is a sensible starting point.

None of it settles status on its own: HMRC looks at how the engagement runs in practice.

What you (the engager) need to do

Issue a Status Determination Statement (SDS) if you're a medium/large business (or a public-sector body of any size).

HMRC's guidance is that, in most cases, the client is responsible for determining the worker's employment status; for a small client outside the public sector, the worker's intermediary is.

Don't put the fractional executive on your internal HR system.

Don't require them to attend daily standups they didn't agree to.

Don't pay for a substitute via your payroll.

If the day-to-day shape of the engagement starts to look like employment, the IR35 outside-status is at risk regardless of what the contract says.

A valid SDS states the conclusion and the reasons for it, and the client must take reasonable care in reaching it — otherwise the tax liability stays with the client.

IR35 questions.

What happens if HMRC challenges an outside-IR35 engagement?

HMRC opens an enquiry, you provide the CEST result + contract + SDS + evidence of how the engagement actually operated. If the practical reality matches the contract — substitution rights respected, contractor controlling working hours, scoped deliverables — the outside status holds. If the engagement looks like disguised employment in practice, HMRC may reclassify and demand back-tax. HMRC's officers work from its published Employment Status Manual, which is worth reading before an enquiry starts. The contract pattern is necessary but not sufficient; the operational reality matters too.

Do I need to issue an SDS?

Yes if you're a medium or large business (the [Companies Act 2006](https://www.legislation.gov.uk/ukpga/2006/46/section/382) size test) or a public sector body. The SDS documents your determination of the engagement's IR35 status, with reasons. If you're a small business outside the public sector, the worker's intermediary is responsible for the determination instead (HMRC).

What if my engagement scope changes?

Re-scope the contract. If the mandate shifts from "build the demand engine in Q1" to "stay on as VP marketing for the next year," that's no longer a fractional engagement — that's an employee. Either convert the contractor to PAYE, or genuinely re-scope back to a fractional mandate with deliverables and an end date.

Is the CEST tool reliable?

CEST (Check Employment Status for Tax) is HMRC's own tool. It's the official starting point, and HMRC says it will stand by the result as long as the information given is accurate and in line with its guidance. Cases on the boundary still warrant specialist legal advice.

Are fractional engagements outside IR35?

It depends on the engagement, not the label. Several clients across the week, scoped deliverables, a fixed term and a genuine right of substitution point towards self-employment; an engager controlling hours and reporting the way an employer would points the other way. A medium or large client makes the determination (HMRC), and CEST is the official starting point.