IR35 legislation has significantly changed the way contractors and employers operate in the UK. Designed to prevent disguised employment, IR35 ensures that individuals working like employees pay broadly the same tax as permanent staff. Since the reforms introduced to the private sector, responsibility for determining employment status has shifted, making IR35 checks more important than ever.

Both contractors and employers must understand the importance of IR35 checks and carry them out correctly. Failure to do so can lead to financial penalties, tax liabilities, and damaged working relationships. This article explains why IR35 checks are essential for contractors and employers in the UK and how they help ensure compliance and confidence.

Understanding IR35 and Its Purpose

IR35 is UK tax legislation introduced to tackle tax avoidance through disguised employment. It applies when a contractor provides services through an intermediary, usually a personal service company, but works in a way similar to an employee.

Under IR35 rules, if the working arrangement is deemed to be inside IR35, the contractor must pay Income Tax and National Insurance contributions as if they were an employee. IR35 checks are used to assess whether a contract and working practices fall inside or outside IR35.

Understanding the purpose of IR35 is the first step in appreciating why regular and accurate checks are essential.

Who Is Responsible for IR35 Checks

Since April 2021, responsibility for IR35 status determination in the private sector generally rests with the end client, unless the client is classified as a small business. Public sector organisations have held this responsibility since 2017.

This shift has increased the importance of IR35 checks for employers and agencies. Contractors must also understand their status, as it directly affects take-home pay and working arrangements.

Clear responsibility means that inaccurate or missing IR35 checks can expose businesses to significant compliance risks.

Reducing the Risk of HMRC Penalties

One of the main reasons IR35 checks are essential is to reduce the risk of HMRC penalties. HMRC can investigate IR35 compliance and impose backdated tax, National Insurance, interest, and fines where incorrect determinations are found.

Employers who fail to carry out reasonable care when performing IR35 checks may be held liable for unpaid tax. Contractors may also face unexpected tax bills if their status is reassessed.

Regular, well-documented IR35 checks demonstrate reasonable care and provide evidence of compliance in the event of an HMRC enquiry.

Protecting Contractors from Unexpected Tax Liabilities

For contractors, IR35 checks provide clarity and protection. Without a clear status determination, contractors may unknowingly operate outside compliance, leading to large tax bills later on.

Accurate IR35 checks allow contractors to understand their position before accepting a contract. This helps them make informed decisions about working through a limited company, umbrella payroll services, or alternative arrangements.

Knowing IR35 status upfront helps contractors plan finances and avoid unpleasant surprises.

Supporting Fair and Transparent Working Relationships

IR35 checks promote transparency between contractors, agencies, and end clients. Clear determinations set expectations around tax treatment, payment structure, and employment rights.

When IR35 checks are not performed properly, disputes can arise over status, pay, and responsibility for tax. These disputes can damage professional relationships and disrupt projects.

Conducting thorough IR35 checks ensures all parties understand their obligations and helps build trust within the supply chain.

Ensuring Compliance with Employment Status Rules

IR35 checks go beyond tax compliance. They require businesses to assess the reality of the working relationship, including control, substitution, and mutuality of obligation.

Employers who conduct IR35 checks are encouraged to align contracts with actual working practices. This reduces the risk of misclassification and strengthens overall employment compliance.

For contractors, this ensures working arrangements accurately reflect the agreed terms and avoid blurred lines between employment and self-employment.

Demonstrating Reasonable Care

HMRC expects businesses to take reasonable care when conducting IR35 checks. This includes using accurate information, reviewing contracts and working practices, and documenting decisions.

Failing to demonstrate reasonable care can result in increased penalties if non-compliance is identified. Employers must show that IR35 checks are not rushed or based on blanket assessments.

Working with experienced advisers such as The Infinity Group can help ensure IR35 checks are thorough, consistent, and compliant with HMRC expectations.

Adapting to Ongoing Changes in Legislation

IR35 rules and HMRC guidance continue to evolve. Regular IR35 checks ensure businesses and contractors stay aligned with current legislation and best practices.

Changes in working practices, contract terms, or project scope can all affect IR35 status. Periodic reviews help identify when a status determination needs updating.

Staying proactive with IR35 checks reduces the risk of outdated assessments leading to compliance issues.

Supporting Better Business Decision-Making

For employers, IR35 checks support better workforce planning and risk management. Understanding the status of contractors allows businesses to structure engagements appropriately and budget for tax costs where applicable.

Contractors also benefit from clearer decision-making. Knowing whether a role is inside or outside IR35 influences rate negotiations, contract length, and working arrangements.

Accurate IR35 checks provide valuable information that supports strategic planning for all parties involved.

Avoiding Blanket Determinations

One common mistake made by employers is issuing blanket IR35 determinations, classifying all contractors as inside IR35 without individual assessment. HMRC has made it clear that this approach does not meet reasonable care standards.

Proper IR35 checks involve assessing each role individually, considering both the written contract and actual working practices.

Avoiding blanket decisions protects employers from compliance risks and ensures contractors are treated fairly.

The Role of Professional Support in IR35 Checks

IR35 legislation is complex, and many businesses lack the internal expertise to conduct accurate checks. Professional support can provide clarity, consistency, and confidence.

Advisers such as The Infinity Group offer specialist knowledge and structured processes to help contractors and employers carry out IR35 checks correctly. This support reduces risk and ensures decisions are defensible if challenged by HMRC.

Conclusion

IR35 checks are essential for both contractors and employers operating in the UK. They protect against financial risk, ensure compliance with tax and employment rules, and support transparent working relationships.

For contractors, IR35 checks provide clarity and help avoid unexpected tax liabilities. For employers, they demonstrate reasonable care and reduce exposure to HMRC penalties.

By taking IR35 checks seriously and seeking expert support from professionals like The Infinity Group, businesses and contractors can navigate IR35 with confidence, minimise risk, and focus on delivering successful projects.