IR35 legislation has transformed the way contractors and businesses operate in the UK. Designed to prevent tax avoidance through disguised employment, IR35 affects how contractors are engaged, paid, and taxed. Carrying out accurate IR35 checks is essential for both contractors and businesses to remain compliant with HMRC regulations and avoid costly penalties. Understanding how IR35 checks work and why they matter helps ensure fair taxation and reduces legal and financial risk.
What Is IR35 and Why It Exists
IR35, officially known as the Intermediaries Legislation, was introduced by HMRC to identify contractors who operate like employees but work through limited companies or other intermediaries. The legislation ensures that individuals who would otherwise be employees pay broadly the same tax and National Insurance contributions as permanent staff.
In the UK, IR35 applies to personal service companies and affects contractors across many industries, including IT, construction, engineering, and professional services. IR35 checks are used to determine whether a contractor falls inside or outside IR35, which directly impacts tax treatment and take-home pay.
Who Is Responsible for IR35 Checks
Responsibility for IR35 checks depends on the size and sector of the organisation engaging the contractor. In the private sector, medium and large businesses are responsible for determining a contractor’s IR35 status. They must issue a Status Determination Statement explaining the decision and the reasoning behind it.
Small private sector businesses are exempt from making IR35 determinations, meaning responsibility remains with the contractor. In the public sector, the responsibility for IR35 checks always sits with the end client.
Understanding who holds responsibility is crucial, as failure to comply can lead to backdated tax bills, penalties, and interest charges from HMRC.
What Are IR35 Checks
IR35 checks are assessments used to determine the nature of the working relationship between a contractor and an end client. These checks evaluate whether the contractor is genuinely self-employed or effectively working as an employee.
HMRC focuses on several key factors when assessing IR35 status. These include the level of control exercised by the client, the contractor’s right to provide a substitute, and whether there is mutuality of obligation between the parties. Accurate IR35 checks require a thorough review of both the written contract and the actual working practices.
Key Factors Considered in IR35 Checks
Control
Control refers to how much authority the client has over how, when, and where the contractor performs their work. Contractors who have significant autonomy over their tasks and methods are more likely to fall outside IR35.
Substitution
The right of substitution is a strong indicator of self-employment. If a contractor can send a suitably qualified substitute to complete the work, and this right is genuine and exercised in practice, it supports an outside IR35 status.
Mutuality of Obligation
Mutuality of obligation examines whether the client is obliged to offer work and whether the contractor is obliged to accept it. A lack of ongoing obligation between both parties points towards self-employment.
Financial Risk
Contractors operating outside IR35 often bear financial risk, such as correcting defective work at their own cost or investing in their own equipment.
Integration
The level of integration into the client’s organisation is also considered. Contractors who operate independently and are not treated like permanent staff are more likely to be outside IR35.
How to Carry Out IR35 Checks Correctly
Accurate IR35 checks require a structured and well-documented approach. Businesses should review contracts, assess working practices, and gather evidence to support their determination.
HMRC’s Check Employment Status for Tax tool is commonly used, but it should not be relied upon in isolation. The tool’s accuracy depends on the quality of the information entered, and it may not capture all nuances of a working relationship.
Professional advice and independent assessments can provide greater confidence and reduce the risk of disputes. Clear documentation and transparent communication with contractors are also essential.
IR35 Checks for Contractors
Contractors should take an active role in understanding and managing their IR35 status. Even when the end client is responsible for the determination, contractors should review their contracts and working practices to ensure they align.
Maintaining evidence of independence, such as multiple clients, business insurance, and control over work methods, can support an outside IR35 status. Contractors should also challenge incorrect determinations through the client’s dispute process if necessary.
IR35 Checks for Businesses
For businesses, IR35 checks are a compliance obligation that requires consistency and fairness. Organisations must ensure determinations are reasonable and based on accurate information.
Failure to conduct proper IR35 checks can result in HMRC transferring tax liability to the business. Implementing standard assessment processes and training relevant staff helps reduce risk and ensures compliance across all contractor engagements.
Common IR35 Check Mistakes
One common mistake is relying solely on contract wording without considering actual working practices. HMRC places significant weight on how the work is performed in reality.
Another error is blanket determinations that place all contractors inside IR35 without individual assessment. This approach increases the risk of disputes and HMRC scrutiny.
Inadequate documentation and lack of transparency can also lead to challenges and compliance issues.
The Role of Professional Support
Navigating IR35 legislation can be complex for both contractors and businesses. Professional support helps ensure IR35 checks are accurate, defensible, and compliant with HMRC guidance.
Companies such as The Infinity Group assist contractors and businesses by offering expertise in payroll, IR35 compliance, and contractor assessments. With a strong understanding of UK tax regulations, professional providers help reduce risk and provide clarity in an evolving regulatory landscape.
Why Regular IR35 Checks Are Important
Working practices and contracts can change over time, affecting IR35 status. Regular IR35 checks ensure that determinations remain accurate and reflect current arrangements.
For long-term engagements, periodic reviews help identify changes that may shift a contractor inside or outside IR35. Staying proactive reduces the likelihood of unexpected tax liabilities.
Conclusion
IR35 checks are a critical part of the UK contracting landscape, affecting how contractors are taxed and how businesses engage flexible workers. Accurate and well-documented assessments protect both parties from HMRC penalties and disputes.
By understanding the key factors involved and carrying out IR35 checks correctly, contractors and businesses can operate with confidence. Working with experienced providers such as The Infinity Group can further support compliance and reduce administrative burden, allowing all parties to focus on productive and compliant working relationships.
