It’s been eight years since the IR35 reforms reshaped public sector. Now it’s been four years since these reforms were rolled out in the private sector. Many firms reacted with caution and overcorrection, causing significant disruptions in supply chains. What have we learned and what should companies be doing now?
HMRC Shifts in Focus
HMRC no longer targets individuals in the media as a result of the original IR35 law. Many of the legacy investigations are over, and many have not reached a tax tribunal because either HMRC dropped their case or taxpayers settled. Tax authority focus has shifted.
HMRC’s approach to compliance checks is different from the way it used to be in the last two decades when it was primarily chasing individuals under intermediaries legislation. HMRC has changed its approach as well.
HMRC conducts its off-payroll checks using a risk-based approach. It first determines whether the firm’s processes and systems present a “low-risk” of misclassification, before deciding whether to do a deeper dive. If HMRC believes that the firm’s approach to compliance is low-risk, then it is likely that the check will be completed within a year. If there are red flags, however, the investigation can be much more expensive and time-consuming.
The new HMRC method of conducting compliance checks highlights a crucial point: preemptive compliance isn’t optional — it’s essential. Firms with a well-documented and robust compliance process will be less likely to have long-running investigations.
Tax Liabilities – What to Expect
Currently, no private firm has received an official tax determination in accordance with the off-payroll regulations. This is not surprising, considering HMRC’s four-year standard look-back period. We expect to see the first tax bills for allegedly misclassified employees around January or Febraury 2026.
It’s unlikely that a tax tribunal will hear and decide a case before 2028, given the pace at which they operate. Remember that very few cases will ever reach that stage, and that it is unlikely that any of them will reach the Supreme Court until 2035. This timeline provides firms with a decade-long period of stability in case law, as they can rely on the principles that were confirmed by the Supreme Court of Canada in 2024 without worrying about newer case laws.
A game-changer: The tax offset mechanism
In April 2024, a long-overdue solution was implemented to address one of the biggest concerns facing businesses today: the disproportionate risk of taxation that comes with IR35 misclassification. Prior to April 2024, businesses could be forced to pay the full PAYE bill even if contractors had already paid income and corporation taxes via their limited companies.
With the new offset provisions that were introduced, the tax paid by contractors is now taken into consideration if HMRC decides that the engagement should be classified as “Inside IR35”. The update to the law reduces financial exposure to businesses to around 15% of the amount paid to the contractor. This includes dividend and corporation taxes paid by individuals.
Due to the disproportionate threat that was previously four times higher than the position based on offset, some firms have reconsidered their previously conservative stances. The contractor model can be very successful when it is backed by compliance.
Better Tools and Processes
HMRC’s Check employment status for tax (CEST), which hasn’t been updated since 2019, is no longer used by many firms. Recent FOI revealed that CEST usage dropped by 50% during the last taxation year. Businesses are moving towards more independent and reliable solutions for status assessment.
Smart firms also keep detailed documentation. Written evidence is used to support status determinations, contracts are carefully drafted, staff are properly trained and compliance is a part of daily operations. Paper trails are important to protect your business, especially since HMRC can go back up to four years.
Clients step up as Agencies Reverse Back
Recruitment agencies have shifted to models where they offer administrative support for clients in determining their status without becoming their tax advisors. Firms are instead taking responsibility for their own status determinations as intended by the legislation.
When engagements do not fall “Outside IR35”, companies are adopting a pragmatic approach. Firms and agencies insist on PAYE payroll rather than pay a PSC with no tax. This carries the risk that future claims will be made. The “not outside IR35” strategy simplifies compliance, and streamlines HMRC’s audits. If an agency asks if deductions have been made correctly, they can simply reply: “All workers who are not Outside IR35 are paid through payroll.”
Five Simple Principles
Years of experience has led to the development of a practical, best-practice framework that companies should adhere to. The five principles have been widely adopted by the industry, and provide a roadmap for risk-free conformity.
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Clients determine their own IR35 status.
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Before the engagement begins, a status decision will be made.
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When the role falls within IR35, a payroll solution is used to pay the employee.
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The contractor’s company receives gross payment if the role is outside IR35.
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All staff members are trained in compliance and adhere to a documented process.
These steps, when correctly followed, remove ambiguity and reduce tax risks, allowing firms to continue working with skilled, flexible contractors who are confident about their compliance.
With the right processes and knowledge, companies have little to worry about IR35.
