If your organisation engages contractors through personal service companies (PSCs), it’s important to understand what happens in an HMRC IR35 check of your off-payroll compliance and vitally, how to prepare for one.

The Off-Payroll Working rules (commonly referred to as IR35, the name of the pre-existing rules) have been in force in the private sector since April 2021, following their earlier introduction to the public sector in 2017. The initial “soft-landing” period is over, and HMRC is now stepping up formal compliance activity. We are seeing a marked increase in IR35 compliance checks and audits, with more organisations now being contacted by HMRC’s specialist off-payroll working team.

At Bauer & Cottrell, we’ve helped many businesses deal with these checks and audits. We know first-hand how stressful and time-consuming they can be, particularly if your IR35 compliance isn’t up to scratch.

Being well-prepared is the most effective way to protect your business and ensure a check is resolved quickly and without issue.

Who is at risk of an HMRC IR35 check?

The Off-Payroll Working rules apply to the following entities who engage off-payroll contractors via their own personal service companies (PSCs):

• All public sector organisations, and
• All medium and large-sized private sector businesses (as defined by the Companies Act 2006).

These organisations must determine whether each engagement is inside or outside IR35, issue a Status Determination Statement (SDS), and operate PAYE where required. In addition, records must be kept and processes should be internally audited at regular intervals.

Small private sector businesses are currently out of scope, but it’s important to note that their status can change if they grow or restructure.

What triggers an HMRC IR35 check?

There are several reasons why HMRC may choose to carry out a compliance check or open a full IR35 audit. These include:

• Routine risk profiling of your industry or sector
• Inconsistencies in PAYE or tax reporting
• High use of off-payroll contractors
• Anonymous reports or whistleblowing
• A previous audit of another tax area that flags IR35 risks
• Failure to issue SDSs, or blanket determinations without evidence

Once your organisation is on HMRC’s radar, even minor gaps in your process can raise red flags.

Typically, the check starts with a compliance check letter from HMRC’s off-payroll working team. This may sound informal, but it marks the beginning of an official review process. The letter outlines HMRC’s intent to assess your compliance and invites you to arrange an initial call.

The call is usually followed by a formal request for information, including your systems, records, and documentation relating to contractor engagements and Off-Payroll processes.

What information does HMRC ask for?

An initial HMRC IR35 check information request typically includes:

• Your hiring process for PSC contractors – whether directly or through agencies or other suppliers.
• Details of your IR35 status determination process – who makes the decisions and how.
• Details on how you decide whether any of your services are fully contracted-out (out of scope).

If HMRC is satisfied that you are applying the rules correctly and taking reasonable care, they may close the check with no further action. HMRC may also highlight areas for improvement in your process, and work with you to ensure these are implemented.

However, if such measures are not adequately implemented or major concerns are raised, it could result in the opening of a full investigation. In this case you would be required to provide more in-depth information including:

• Copies of SDSs and supporting evidence
• Your dispute resolution procedures
• Contracts, scopes of work, and working practices
• Any assessments relating to contracted-out services
• Communications with agencies and contractors
• Interviews with relevant staff or hiring managers

What are the consequences of getting it wrong? 

If HMRC concludes that you have failed to comply or have not taken reasonable care, the consequences can be serious.

This could result in:

• Liability for unpaid PAYE tax, employer and employee NICs, and Apprenticeship Levy
• Interest charges on late payments
• Financial penalties if HMRC deems that reasonable care was not taken
• Disruption to contractor supply chains, especially if determinations are challenged or reversed

While HMRC has said penalties will not apply for genuine mistakes made during the early stages of the rules (e.g. 2021/22), this no longer offers protection for more recent years or deliberate non-compliance.

What does best practice look like?

The most effective way to mitigate the risk associated with an HMRC IR35 check is to ensure your processes are robust and well-documented. Best practice includes:

• A clear and consistent status determination process which considers the reality of the working arrangements
• Dealing with each engagement on its own merits without applying blanket determinations
• A clear and fair process to resolve disputes over determinations
• Comprehensive records of all of your processes and determinations
• Contracts that reflect actual working practices
• Regular internal audits or third-party reviews of your processes
• Demonstrating a comprehensive understanding of how IR35 status is decided, ideally through training 
• Evidence that you have correctly established where a service is fully contracted-out

You can read HMRC’s guidance on what organisations should be doing to comply here.

Need help getting prepared?

We’ve supported many organisations with HMRC IR35 checks and audits, and understand what HMRC is looking for.  Our IR35 Compliance Audit Service helps you identify gaps, strengthen your documentation, and demonstrate reasonable care – before HMRC ever makes contact.

Being prepared is your best defence. Don’t wait until HMRC comes knocking.

 Browse our full range of services for engagers here.