The term IR35 has become one of the most talked-about topics among contractors and businesses across the UK in recent years. Whether you’re an independent IT consultant, an engineer, or a construction professional working through your own limited company, chances are you’ve heard about IR35 and the importance of compliance.

At the heart of IR35 are status checks carried out by HMRC to determine whether contractors are genuinely self-employed or effectively working as employees in disguise. These checks can have serious tax implications, which is why it’s crucial to understand how they work and what to expect.

In this guide, we’ll break down what IR35 checks involve, why HMRC conducts them, and how contractors can prepare.

1. What Is IR35?

IR35 is the common name for the UK’s off-payroll working rules, introduced in 2000. The legislation was designed to tackle “disguised employment,” where workers supply services via an intermediary — usually a limited company or personal service company (PSC) — but operate in a way that mirrors a traditional employee relationship.

If HMRC deems that a contractor falls inside IR35, it means they should be taxed as an employee, paying Income Tax and National Insurance Contributions (NICs) similar to permanent staff.

If they are outside IR35, they are considered genuinely self-employed and can continue to benefit from tax efficiencies associated with running a limited company.

2. Why Does HMRC Carry Out IR35 Checks?

HMRC carries out IR35 checks to ensure that contractors and businesses are paying the right amount of tax. The government has long argued that disguised employment costs the Treasury billions of pounds each year.

For contractors, being caught inside IR35 when you’ve been operating outside can lead to:

• Significant tax bills (including backdated payments)
• Penalties and interest
• Disruption to ongoing contracts

For businesses, failing to apply IR35 correctly can result in financial liability and reputational damage.

3. Who Is Responsible for IR35 Checks?

Responsibility depends on whether you’re working in the public sector or private sector:

• Public sector (since 2017) – The end client (organisation hiring the contractor) is responsible for determining IR35 status.
• Private sector (since April 2021) – Medium and large-sized businesses must assess IR35 status. Small businesses are exempt, meaning contractors working with them remain responsible for their own determination.

This shift in responsibility means contractors now rely heavily on clients making correct assessments.

4. What Does an IR35 Check Involve?

When HMRC launches an IR35 investigation, they will review:

• Contractual agreements – The written contract between contractor, agency, and client.
• Actual working practices – How the contractor operates day-to-day.
• Key factors such as:
• Control – Does the client control how, when, and where the contractor works?
• Substitution – Can the contractor send a substitute to complete the work?
• Mutuality of obligation (MOO) – Is the client obliged to provide continuous work, and is the contractor obliged to accept it?

These three tests — control, substitution, and MOO — are central to IR35 status decisions.

5. Common Red Flags in IR35 Checks

Contractors should be aware of behaviours or contract terms that may raise red flags during an HMRC check, such as:

• Being treated like a permanent employee (e.g., staff benefits, fixed working hours).
• Contracts that don’t allow genuine substitution.
• Working exclusively for one client for long periods without clear independence.
• Receiving payment in a way that mimics payroll.

If any of these apply, HMRC may argue that the relationship is one of employment rather than self-employment.

6. The Role of the CEST Tool

HMRC has developed an online tool called Check Employment Status for Tax (CEST), which businesses and contractors can use to assess whether a contract falls inside or outside IR35.

However, many industry experts argue that CEST is not always reliable, as it sometimes fails to consider key elements of working practices. While it can provide a useful indication, contractors are advised not to rely on it alone.

7. Preparing for an IR35 Check

If HMRC decides to investigate your status, preparation is key. Contractors should:

1. Keep clear contracts – Ensure your written contract accurately reflects the working relationship.
2. Document working practices – Keep evidence of independence, such as using your own equipment or declining client benefits.
3. Take professional advice – Specialist accountants or payroll providers can review contracts for IR35 risks.
4. Have insurance – Some contractors take out IR35 investigation insurance to cover costs if HMRC launches an inquiry.

8. What Happens During an HMRC IR35 Investigation?

An IR35 investigation typically follows this process:

1. Initial letter – HMRC informs the contractor or business they are under review.
2. Information request – Contracts, timesheets, and other evidence may be requested.
3. Interviews – HMRC may speak with both contractor and client to understand working practices.
4. Decision – HMRC issues a conclusion on whether the work is inside or outside IR35.
5. Appeal – If you disagree, you can appeal through a tribunal.

Investigations can be lengthy, sometimes lasting months or even years.

9. How Contractors Can Protect Themselves

To reduce the risk of being caught out by IR35 checks, contractors can:

• Regularly review contracts with a specialist
• Avoid “employment-like” behaviour (e.g., requesting staff benefits)
• Work with multiple clients where possible
• Maintain business-like practices (marketing your services, having business insurance, etc.)

Being proactive is far better than trying to defend yourself once HMRC has already raised concerns.

10. How Businesses Can Prepare for IR35 Checks

For end clients and agencies, preparation is equally important:

• Carry out status determinations fairly and consistently
• Keep records of decisions and reasons
• Communicate clearly with contractors
• Consider engaging payroll specialists to manage compliance

By taking these steps, businesses can avoid falling foul of HMRC scrutiny.

11. The Infinity Group and IR35 Support

For contractors and businesses looking for professional support, payroll specialists such as The Infinity Group play a vital role. Based in London, The Infinity Group provides CIS payroll, umbrella payroll, and IR35 compliance services tailored to the needs of the UK’s construction and contracting industries.

With expertise in HMRC compliance, they help contractors and businesses navigate IR35 checks confidently, ensuring contracts are structured correctly and that risks are minimised.

12. The Future of IR35 Checks

IR35 continues to evolve, with ongoing debates about fairness, reliability of CEST, and the burden on contractors. However, what remains clear is that HMRC will continue to carry out checks, and both contractors and businesses must take compliance seriously.

By staying informed and seeking expert advice, contractors can continue to operate successfully while avoiding the pitfalls of an HMRC investigation.

Final Thoughts

For UK contractors, IR35 checks are not something to ignore. They carry significant financial and professional risks, but with the right preparation, you can minimise the impact.