IR35 Enquiry from HMRC: What Happens and How Far It Can Go

An IR35 or off-payroll working enquiry checks whether, if the contractor had engaged directly with the end client rather than through an intermediary, the relationship would have looked like employment for tax purposes. This is a factual and legal test, not a matter of what the parties called the arrangement or how the contract was worded on paper.

Chapter 8 ITEPA 2003 applies where a worker supplies services through their own intermediary, typically a personal service company, and the end client in the private sector qualifies as small; the contractor's company is then responsible for applying the rules. Chapter 10 ITEPA 2003 applies to medium and large private sector clients and all public sector clients, placing responsibility for the status decision on the client and, usually, the PAYE and National Insurance obligation on the fee-payer.

HMRC opens status enquiries where a contractor's arrangements look, from available information, more like disguised employment than genuine self-employment: long-running engagements with a single client, day-to-day direction similar to employed staff, no meaningful right of substitution, or a Status Determination Statement that appears to have been generated without proper regard to actual working practices.

Sector-focused activity, referrals from PAYE reviews, and information gathered from other compliance work can also trigger a status enquiry. As with other compliance checks, being selected does not itself establish that the status conclusion reached was wrong.

HMRC can request information and documents reasonably required to check the status conclusion, including contracts for services, any Status Determination Statement and the reasoning behind it, communications about how work was allocated and supervised, and evidence of substitution being offered, accepted or refused, using Schedule 36 FA 2008 powers if needed.

Witness-style evidence about day-to-day working, sometimes gathered through meetings with the contractor, end client managers or agency staff, can carry significant weight because status turns heavily on practical reality rather than contract wording alone. You can question requests that are not reasonably required, and certain formal notices carry appeal rights, but engaging constructively rather than refusing outright is generally the better course.

IR35 and off-payroll enquiries tend to run longer than many other compliance checks because status depends on multiple factual strands that often need to be tested through correspondence, meetings and sometimes contemporaneous witness accounts. Straightforward cases with clear, well-evidenced substitution or genuine business risk can conclude sooner; contested, long-running engagements often take considerably longer to resolve.

The enquiry ends when HMRC confirms the status treatment applied was correct, or issues a determination or assessment treating the engagement as deemed employment for the periods concerned. Chapter 10 also has a client-led status disagreement process that must be exhausted or considered before matters proceed further in some circumstances.

If HMRC concludes an engagement should have been treated as employment, the practical effect is that Income Tax and National Insurance should have been deducted through PAYE, and the responsible party is assessed for the shortfall, plus interest. Since 2021, statutory offset rules allow the amount collected from the fee-payer or client to be reduced by tax the worker or the worker's company has already paid on the same income, to prevent double taxation, though this offset relies on evidence being obtained and is not automatic without a claim.

Behaviour-based penalties under Schedule 24 FA 2007 can apply where a return or determination was inaccurate due to a lack of reasonable care or deliberate conduct, though HMRC has stated it will generally not seek a penalty where an accurate CEST determination is relied upon consistently with the underlying facts. A prompt, cooperative response and clear evidence of reasonable care in reaching the original status decision both help reduce penalty exposure.

A common mistake is relying entirely on a CEST result generated once at the start of an engagement without revisiting it as working practices evolved, since a status conclusion can become out of date if the reality of the role changes. Another is drafting contracts with substitution and control clauses that are never used or reflected in practice, since HMRC and tribunals look past contract wording to what actually happened.

End clients sometimes issue blanket status determinations across a whole contractor population without individual assessment, which weakens the Status Determination Statement's credibility if challenged. Contractors sometimes also fail to keep records of how work was actually carried out, leaving them unable to counter HMRC's account of the relationship years later.

Consider a contractor engaged through a personal service company by a medium-sized business, working on a long-running project. HMRC opened an enquiry after noting the engagement had lasted several years with no break and the contractor used equipment provided by the client. The client's original Status Determination Statement referred to a substitution clause in the contract, but on questioning, the contractor confirmed no substitute had ever been proposed or would realistically have been accepted for the type of work involved.

During the enquiry, however, evidence emerged that the contractor set their own hours, worked for other clients concurrently, and bore financial risk through fixed-price elements of some project phases. Taking the whole picture together, HMRC concluded the balance of factors, particularly the absence of the level of control typical of employment and genuine business risk, supported the self-employed status treatment, and closed the enquiry without an assessment. The case illustrates why a single weak factor, such as an unused substitution clause, does not automatically mean an engagement falls inside IR35.