Managing HMRC IR35 rules: tips for UK businesses

If your business uses contractors through personal service companies, the IR35 rules decide whether that contractor should be taxed like an employee for that engagement. For many UK businesses, the biggest risk is not only reaching the wrong answer. It is being unable to show HMRC how the decision was made, who checked it, and whether the contract matched the real working relationship. A clear process, good records, and regular reviews can make an HMRC enquiry easier to manage. The IR35 rules should be checked before work starts, not after HMRC asks questions. HMRC explains that the off-payroll working rules apply where a worker provides services through an intermediary and would have been an employee if engaged directly.

Why HMRC asks about the IR35 rules

• HMRC looks at facts, not labels.
• The client may carry the PAYE and NIC risk.
• A good file is often the best defence.

HMRC enquiries usually start because HMRC wants to test whether the off-payroll working position has been applied correctly. HMRC wants to know whether a contractor is genuinely operating as an independent business, or whether the working arrangement looks more like employment for tax purposes.

For public authorities and medium or large private sector clients, the client normally has to decide whether the IR35 rules apply to each relevant engagement. The decision must be communicated through a Status Determination Statement (SDS), and the business must take reasonable care when reaching the conclusion.

HMRC can ask for contracts, SDS records, CEST outputs, payment details, emails, onboarding documents, and evidence of the day-to-day working pattern.

Main IR35 rules problems for UK businesses

• A contract can say one thing while practice shows another.
• Blanket decisions create unnecessary risk.
• Changes during a project can affect the answer.

The main issue is that employment status is fact-based. A contractor may look outside the IR35 rules on paper, but inside the IR35 rules in practice if the business controls how, when, and where the work is done.

Key areas to review

1. Control: Can the business direct the contractor’s work in detail?
2. Substitution: Can the contractor send a suitably qualified substitute in practice?
3. Mutuality of obligation: Is there an expectation of ongoing work and acceptance?
4. Financial risk: Does the contractor risk profit or loss from the work?
5. Integration: Does the contractor look like part of the internal team?

Issue to check	Why it matters	Simple evidence to keep
Written contract	Shows the agreed legal terms	Signed agreement and statement of work
Working practices	Shows what actually happens	Project emails, meeting notes, delivery logs
SDS reasoning	Shows how the decision was reached	CEST result, reviewer notes, approval record
Contractor changes	Shows whether a new review is needed	Contract variation, new role description

A business should avoid blanket assessments. Deciding that every contractor is outside the IR35 rules because they all invoice through companies is risky. So is deciding that everyone is inside the IR35 rules without reviewing the facts of each role.

How to stay compliant with the IR35 rules

• Build IR35 into contractor onboarding.
• Make the SDS specific to the engagement.
• Review the decision when the work changes.

Compliance is easier when the IR35 rules are treated as part of hiring and procurement, not as a tax issue that appears after the contract is signed. The business should know who owns the process, what information is needed, and when a review must happen.

Start with size and scope

Before reviewing status, confirm whether the business must apply the client-led rules. Public authorities and medium or large private sector clients are generally responsible for deciding employment status for relevant off-payroll engagements. Small private sector clients do not usually have to make the status determination, although they may need to confirm their size when asked.

The size test needs care. From 6 April 2025, two company size thresholds increased for financial years beginning on or after that date: turnover above £15 million and balance sheet total above £7.5 million. The 50 employee limit remains unchanged. The practical effect can depend on the financial year, group position, filing dates, and the two-year rule.

Keep a contractor register

A contractor register gives the business a simple control point. It should record:

1. The contractor’s name and intermediary.
2. The agency or supplier, if there is one.
3. The internal manager responsible for the work.
4. The start date, expected end date, and project description.
5. The SDS result and payroll treatment.

This register helps the business spot long-running engagements, missing SDS records, and contractors whose work has changed since the original decision.

Make the SDS useful

An SDS should explain the conclusion and the reasons for it and be clear enough for all the parties involved.

A useful SDS should cover the main reasons for the decision, including control, substitution, mutuality of obligation, financial risk, and integration into the business. If CEST is used, save the full output and the answers entered. If professional advice is taken, keep the advice note and the facts supplied to the adviser.

Re-check when the facts change

The IR35 rules should be reviewed again if the contractor moves to a new project, the contract is extended, the reporting line changes, or the business changes how the work is supervised.

For UK or UAE connected businesses with UK contractor arrangements, WellTax can help assess whether the IR35 rules have been reviewed in a practical and documented way, alongside wider UK tax and accounting services.

How to check the IR35 rules before work starts

• Check the real job before the contract is signed.
• Ask the manager who will work with the contractor.
• Save the evidence before the first invoice is paid.

The best time to check contractor status is before the engagement starts. At that point, the business can still adjust the contract, clarify expectations, and make sure payroll treatment is correct from the beginning.

Step 1: collect the facts

The person completing the review should not rely only on the contractor’s job title or a standard template contract. They should collect the proposed contract, statement of work, role description, project plan, expected working location, payment terms, and details of who will supervise the work.

They should also ask:

1. What outcome is the contractor being paid to deliver?
2. Can the contractor decide how to complete the work?
3. Can the contractor send a substitute, and would the business accept one?
4. Is the contractor paid for a project outcome, time worked, or availability?
5. Will the contractor attend the same internal meetings as employees?

Step 2: compare the contract with reality

The contract should match what will actually happen. If the contract says the contractor can provide a substitute, but the project manager would never accept one, the clause may carry little practical weight. If the statement of work says the contractor is delivering a defined project, but the business uses them like an extra team member, that also creates risk.

A good pre-start review should involve the manager who understands the work. This is often where businesses make mistakes, because finance or procurement may complete the review without checking the real working arrangements.

Step 3: use CEST carefully

HMRC’s Check Employment Status for Tax tool, known as CEST, gives HMRC’s view of employment status based on the information entered. It can be used to check whether the off-payroll working rules apply, whether a worker is employed or self-employed for tax purposes, and whether a change to a contract or working arrangement affects the result.

CEST can be helpful but the answers need to be accurate and supported by evidence. Save the result, the answers, and the documents used. If the result is unclear, or if the facts are unusual, the business should consider specialist advice before issuing the SDS.

Step 4: decide the payroll treatment

If the engagement is inside the IR35 rules, the deemed employer must deduct Income Tax and employee NI contributions, and pay employer NI contributions where required. Businesses reviewing payroll exposure may also find this practical guide to PAYE responsibilities for UK employers useful.

If the engagement is outside the IR35 rules, the business should still keep the reasoning, because HMRC may ask why the business reached that conclusion.

Practical response plan for HMRC enquiries

• Keep one person in charge of the response.
• Check the facts before sending documents.
• Use the enquiry to improve future controls.

When HMRC opens an enquiry, first confirm what is asking about: one contractor, a tax year, a business unit, or the whole contractor population. Then appoint one response lead, gather the relevant contracts and SDS records, and check that the documents match the real working practices.

The response should be clear, factual, and organised. If an error is found, the business should assess the tax position and correct the process for future engagements. The best HMRC enquiry response is prepared before any letter arrives, through clean SDS records and clear ownership across HR, finance, procurement, and tax.

Written by Fabrizia Beux, Senior Associate, ACA ICAEW, WellTax.