Spike is able to spar with Buffy,

...

...

because he has no intent to harm her, and therefore the chip doesn't kick in.

I'm not on Sky, so I could be wrong about this, but do you think it could have something to do with the context of the fight?

Spike actually *tells* Buffy he can throw punches, etc at her while they spar because he doesn't have the intention to do harm.

Also, are we ever actually told by the people who put the chip in exactly how it works.

Nope.

Or is Spike (and so the audience) only going on trial and error?

Trial and error. Spike didn't know he wouldn't get the migraine attacking a demon until he did, didn't know he could spar effectively until they tried, and even used the 'chip test' to find out if Tara was demonic or not. He gave her a bloody nose and got a migraine, which meant she was free of demon taint.