An IR35 investigation can be initiated in several ways. HMRC uses risk assessment and information from a range of sources to decide which tax positions and engagements to examine.
And, unsurprisingly, the investigation process is usually slow and methodical.
For contractors and clients, understanding how an investigation starts, the evidence requested by HMRC, and the possible outcomes of an enquiry can remove some of the uncertainty and stress.
In this guide, we explain how IR35 enquiries work under both Chapter 8 of ITEPA 2003 (the original IR35 rules) and Chapter 10 (the Off Payroll rules).
The article links to our core status test guides and to relevant GOV.UK and legal commentary.
1. How an IR35 investigation usually begins
There are several ways an IR35 compliance check may arise.
Risk profiling and data checks
HMRC uses risk assessment and information already available to it to identify cases for compliance checks.
Where HMRC identifies a potential employment status or tax compliance risk, a compliance officer may open a check.
Information from end clients and agencies
Under the Off Payroll rules, clients issue Status Determination Statements (SDS), and HMRC may obtain information from clients, agencies and other parties when checking whether the rules have been applied correctly.
Contracts, working arrangements and the way an engagement has been classified may all become relevant during a compliance check.
Read more: Status determination statements and client responsibilities.
Targeted HMRC compliance activity
HMRC may undertake targeted compliance activity where it considers there is a particular risk of non-compliance, including within sectors that make significant use of contractors and other off-payroll workers.
Previous compliance history
Previous enquiries, tax returns and other information already held by HMRC may form part of its wider risk assessment when deciding whether further compliance activity is appropriate.
2. The initial letter
An IR35 compliance check will normally begin with correspondence from HMRC explaining the tax position it wants to examine and requesting relevant information.
Depending on the circumstances, HMRC may open a formal enquiry into a tax return or make information requests. HMRC also has formal information-gathering powers under Schedule 36 Finance Act 2008 where the statutory conditions are met.
The tone is usually neutral.
HMRC often says it is checking the company’s tax position, and IR35 may not be mentioned explicitly in the first letter.
The first request may ask for:
- the written contract
- any renewals or variations
- a description of working practices
- client contact details
- invoices and timesheets
You should always take care before replying to HMRC and, ideally, use a professional tax adviser. Any communications you make will form part of the record and may be referred to at a later date.
For guidance on some of the key IR35 status factors, read:
3. The ‘evidence gathering’ stage
Once you know that IR35 is the subject of the enquiry, the process becomes simpler in some ways, but expect even apparently straightforward cases to take time to deal with.
The contract review
HMRC will look at:
- any right of substitution and its limits
- control clauses covering how, when and where work is done
- termination clauses and notice periods
- intellectual property and ownership of deliverables
- insurance requirements and who must hold cover
- references to HR policies and staff procedures
- exclusivity and non-compete clauses
IR35 cases should be considered with reference to past case law. The taxpayer can refer to CEST results, but HMRC’s commitment to stand behind a CEST determination depends on the information entered being accurate and continuing to reflect the engagement.
Find out more here: IR35 tools and CEST.
Working practices – interviews
HMRC may contact the client’s hiring manager and compare the evidence provided about working practices with the contractual terms and other evidence relating to the engagement.
Typical questions include:
- who decided how work was done day to day
- whether the contractor could decline tasks
- whether the work was defined by a project or was ongoing
- whether the contractor worked alongside employees on similar duties
- whether the contractor attended employee meetings or followed internal rules
Clients may provide simple, unnuanced answers, which may unintentionally support an inside-IR35 stance, so accuracy is key, as is professional representation.
Third-party information
HMRC can request information from agencies and other parties under Schedule 36 powers, subject to the statutory requirements, including copies of contracts, timesheets and payment schedules.
Company records
HMRC may request relevant company records, which can include bank statements, dividend vouchers, payroll records and company accounts where these are reasonably required for checking the tax position.
This information may be used to establish how assignment income has been treated and taxed.
4. Common issues HMRC focuses on
Substitution in real life
The existence and scope of any right of substitution can be important when determining whether the worker is required to provide personal service.
A genuine right may still be subject to reasonable conditions, such as requirements relating to a substitute’s qualifications or suitability. The precise wording of the right and the wider contractual arrangement therefore matter.
Guide: Proving you have the right to provide a substitute.
Day-to-day control
Another key status factor is ‘control’. HMRC will test whether the client has the right to direct how work is done, not just whether they actually exercise that control every day.
Guide: Control and IR35.
Integration
One of the things HMRC tests is whether the contractor has become embedded in the client’s setup rather than operating at arm’s length.
Examples include line management responsibilities, use of staff systems, involvement in employee appraisals, or being placed on rotas with permanent staff members.
Guide: Integration and being part and parcel.
Mutuality of obligation
Mutuality of obligation (MOO) is central to employment status case law and is now expressly addressed within CEST.
Following the Supreme Court’s decision in HMRC v Professional Game Match Officials Ltd (2024), the necessary mutual obligations can exist within an individual engagement where the worker undertakes to perform work and the engager undertakes to pay for it.
An overarching obligation to offer and accept future work is not required in order to satisfy this initial stage of the employment status test. The nature and extent of any further obligations remain relevant when considering the relationship as a whole.
Guide: Mutuality of obligation.
Financial risk and business structure
Is the contractor truly working in business on their own account?
Potential indicators include having multiple clients, paying for professional indemnity insurance, having to correct work at own cost, ownership of equipment and genuine responsibility for project deliverables and timescales.
No single factor determines status. These considerations form part of the wider picture of the relationship.
Guide: Financial risk.
5. How long does an IR35 investigation last?
There is no standard timetable for an IR35 investigation.
An enquiry may involve an initial information request, consideration of the contractual arrangements, enquiries into working practices, discussions with the client or other parties and further exchanges between HMRC and the taxpayer.
Straightforward cases may be resolved relatively quickly, while complex disputes can continue for many months or, in some cases, years. If the dispute proceeds through statutory review, Alternative Dispute Resolution or the tribunal system, the overall process can take considerably longer.
If HMRC concludes that IR35 applies under Chapter 8, it may calculate the deemed employment payment and assess the contractor’s intermediary for the resulting tax and National Insurance liabilities.
Under Chapter 10 (Off Payroll), responsibility depends on whether the statutory obligations have been met. If the client fails to take reasonable care when making its status determination, the PAYE and National Insurance liability can remain with the client.
Where the client has complied with its obligations, responsibility for operating PAYE normally falls on the fee-payer or deemed employer, which may be a recruitment agency. Statutory liability transfer provisions can also apply in particular circumstances.
Read our guide to the Off Payroll regime: Off Payroll rules explained.
6. Possible investigation outcomes
No further action
If HMRC accepts the evidence and concludes that IR35 does not apply, the enquiry is closed. This may occur where the contractual terms and other evidence support an outside-IR35 position.
Chapter 8 deemed payment
For engagements under the original IR35 rules, HMRC may assess the contractor’s company for PAYE and NICs based on the deemed employment payment calculation. Interest and, where applicable, penalties may be added.
Liability under Chapter 10
For engagements under the Off-Payroll rules, the location of the PAYE and National Insurance liability depends on whether the parties have complied with their statutory obligations.
If the client fails to take reasonable care in reaching and communicating its status determination, liability can remain with the client.
Where the client has met its obligations, the fee-payer or deemed employer will normally be responsible for operating PAYE where the rules apply, subject to the statutory liability transfer provisions.
HMRC imposes a penalty
There is no separate fixed IR35 penalty scale.
Where tax has been underpaid, penalties may arise under the general tax penalty rules. The amount depends on the particular statutory regime and circumstances, including the behaviour that led to the error and whether the taxpayer disclosed it to HMRC.
Careless, deliberate and deliberately concealed inaccuracies can attract different penalty treatment, while taking reasonable care can be relevant when deciding whether a penalty is due.
This penalty analysis is separate from the client’s Chapter 10 duty to take reasonable care when making an employment status determination. Under the Off-Payroll rules, failure to take reasonable care can affect where responsibility for PAYE and National Insurance sits.
7. Can you appeal HMRC’s decision?
If you disagree with HMRC’s conclusion, you have several options:
- Ask for a statutory review by an independent HMRC officer.
- Use Alternative Dispute Resolution for a facilitated meeting with an HMRC mediator.
- Appeal to the First-tier Tribunal if agreement cannot be reached.
You can read HMRC’s general appeals guidance here: https://www.gov.uk/tax-appeals.
For independent IR35 insights and case law, helpful resources include:
8. How to reduce the risk of investigation
Practical steps that help reduce risk and strengthen your position include:
- maintaining written evidence of working practices, including emails and project documentation
- using independent contract reviews for higher value or long-term roles
- holding appropriate insurance and demonstrating genuine business activity
- ensuring SDS decisions are documented and consistent if you are the client
- regularly checking engagements against the main status tests
You can use our free IR35 Status Checker to work through the main employment status factors and get an indication of whether an engagement is more likely to fall inside or outside IR35.
Overview of the tests: IR35 status tests.
Our introductory guide: IR35 basics.
Key point
HMRC investigations are evidence-led.
The contractual terms and evidence of how the engagement operated in practice may both be important when establishing the true agreement and applying the employment status tests.