IR35 audits: a practical guide for organisations

An IR35 audit is a private, structured review of how an organisation applies the off-payroll working rules to engagements involving intermediaries, usually personal service companies.

Organisations commission an audit to test whether their off-payroll processes are consistent, properly documented, and whether status determinations and Status Determination Statements (SDS) are made with reasonable care.

Does your organisation need an IR35 audit?

Why IR35 audits exist

The main risk for medium and large-sized clients is making incorrect, inconsistent, or careless status decisions.

Audits are there to pose some simple questions which matter in practice:

Are we taking reasonable care when we make status determinations?
Are our SDS decisions based on the correct contractual terms and relevant circumstances of each engagement?
Could PAYE and NIC liabilities rest with, or move to, another party because statutory obligations have not been met?
Can we provide evidence for decisions made if they are challenged later?

What happens during an IR35 audit?

A detailed IR35 audit goes well beyond simply reviewing a handful of contracts.

It examines how the organisation actually operates the off-payroll rules in practice. Who makes status decisions, what evidence is gathered, how determinations are recorded, and whether the relevant contractual terms and employment status factors genuinely support the conclusions being reached.

Governance and process

Who is in charge of the off-payroll process (HR, procurement, tax, legal, hiring managers)?
What is the approval process for new engagements?
What information is collected before an SDS is issued?
Is the SDS given to the worker and the relevant party in the contractual chain, and passed down the chain where required?
Is there a process for dealing with status disputes, and is it used in practice?

For a background on the off-payroll rules, read what recruiters and clients need to know.

Individual engagement reviews (evidence-based sampling)

Most audits include a sample of contractor engagements, chosen to reflect different teams, roles, and engagement models.

Each one is usually checked against the contractual terms and the relevant circumstances and evidence surrounding the engagement.

A review will focus on various employment status factors, such as:

Control (what rights does the client have over what is done, and how, when and where it is done?) see: control
Substitution (does a genuine contractual right exist, and what restrictions apply?) see: proving the right to provide a substitute
Mutuality of obligation (what obligations exist to offer, accept and perform work under the engagement?) see: mutuality of obligation
Financial risk (do the facts show genuine commercial exposure) see: financial risk
Part and parcel / integration (to what extent is the individual integrated into the client’s organisation?) see: part and parcel and integration
Business on own account (does the wider picture support genuine independence?) see: business on own account

For examples of the contractual wording commonly examined in these reviews, see our guide to IR35 contract clauses.

An audit may identify inconsistencies between the contractual documents and evidence about how an engagement operates. These inconsistencies need to be investigated rather than assuming that either the written contract or observed practices automatically determine status.

In IR35 tax cases, the contractual terms must first be established using ordinary principles of contractual interpretation. The employment status tests are then applied to the resulting hypothetical contract, with other relevant factors considered as appropriate.

Evidence about how the engagement operates may be relevant to establishing the true contractual terms and applying the status tests, but genuine contractual provisions cannot simply be disregarded because they were not exercised in practice.

Status tools and consistency (including CEST)

Some organisations use HMRC’s official employment status tool, CEST. Some don’t, and others use it inconsistently.

If you do use CEST, an audit will usually examine:

Whether the inputs are gathered properly and accurately, rather than based on guesswork
Whether different teams are answering questions consistently
Whether the result is being applied on the basis of accurate information and in accordance with HMRC guidance
What do you do when CEST returns an inconclusive result?

See: CEST explained and the wider overview of IR35 status tests.

Supply-chain exposure

An audit will often examine how the organisation manages labour supply chains, especially when agencies, consultancies, or statement of work providers sit between the client and the worker.

Some practical checks include:

Whether the correct party is issuing the SDS
Whether the SDS is passed down the chain properly
Whether contracts and onboarding align across parties
Whether the organisation understands where liability can land

What an IR35 audit is not

Not an HMRC enquiry: this is an entirely different scenario. Read our guide to an HMRC IR35 investigation.
Not just contract drafting: the contractual terms must be correctly established, and the status assessment must also consider the relevant evidence and circumstances of the engagement.
Not a “blanket decision” exercise: clients must take ‘reasonable care’ when making status decisions. Using a common process or role-based assessment is not automatically non-compliant, but material differences between engagements must be properly considered.

Typical deliverables from an IR35 audit

The deliverables you can expect to receive following an audit will vary between providers, but will typically include the following:

A written report identifying key risks and inconsistencies
Engagement-level findings (often a sample with rationale)
Process improvements: onboarding, evidence capture, approvals, governance
Recommendations for training hiring managers and stakeholders
A plan for re-testing engagements periodically, and where there are material changes to terms, conditions or working arrangements

How much does an IR35 audit cost?

Costs vary based on the contractor population, complexity, and whether the organisation wants a full review or a narrower health check.

At the “proper” end of the market, organisations often pay several thousand pounds, and large contractor populations can push that higher.

The reason firms pay for this is simple: the downside of getting IR35 wrong can be materially larger than the cost of a structured review.

Need an IR35 audit for your organisation?

If you’re looking for an independent IR35 audit, IR35 Update can forward your details to a market-leading specialist who can help.

Please feel free to email us, and we will get back to you right away.

Email the editor, James Leckie: [info@ir35update.co.uk](mailto:info@ir35update.co.uk)