IR35 Compliance: A Complete Guide for UK Businesses
IR35 compliance needs to be a critical focal point for any business engaging contingent workers through Personal Service Companies.
When the IR35 off-payroll working legislation was extended to the Private Sector in 2021 businesses implemented new processes and procedures to meet IR35 requirements. A few years on, do these same practices still hold up? Are they effective for risk management? Would they stand up to robust scrutiny if required?
In this comprehensive guide we’ll recap on what IR35 is, the implications for your business and the ongoing steps you should be taking to manage IR35 compliance. This includes:
Understanding the implications of IR35 for your business
What is IR35?
IR35, known as the off-payroll working rules, was introduced by HMRC to ensure that contingent workers pay the correct amount of tax and National Insurance. It affects individuals providing their services through Personal Service Companies (PSCs), which you may also see referred to as Limited Company contingent workers. The legislation aims to distinguish between genuine external contingent workers and ‘disguised employees’ — off-payroll workers who operate in a similar way to permanent workers but are engaged through their own business.
To determine whether IR35 applies to a contingent worker, HMRC requires the end client, whom the worker is delivering their services to, completes a Status Determination Statement (SDS) – which declares whether they are in or out of scope for IR35. Put simply, in scope suggests their working practices are too like permanent members of staff, so IR35 applies, and tax and national insurance must be paid, known as a Deemed Payment. Out of scope determinations on the other hand have found that the working practices suggest the contingent worker is operating independently, so IR35 does not apply, and the worker is responsible for managing their own tax implications as a business owner. IR35 needs to be assessed for each assignment a contingent worker operating through a PSC undertakes, and where working practices change significantly and their responsibilities alter, a new SDS needs to be issued.
To create Status Determination Statements HMRC recommends using their Check Employment Status for Tax (CEST) online tool, which had an update in April 2025. Other tools have been developed by companies offering IR35 support, and it’s important for businesses to make an informed decision about which they believe will provide the most accurate Status Determination Statements. It’s worth noting though, HMRC say they will stand by their CEST tool’s outcomes for tax purposes provided accurate information has been entered and it has been used in line with their guidance.
Why IR35 compliance matters
Taking a lenient approach to IR35 can lead to significant financial penalties, legal complications, and reputational damage. IR35 compliance shouldn’t be just about generating Status Determination Statements; it’s an ongoing effort that requires strategic direction and operational diligence. Adequate monitoring and robust compliance processes will reduce the potential risks of non-compliance, which can include back taxes, interest and fines.
Reasonable care is also a significant measure for HMRC should they open an investigation into how IR35 is being managed within your business. They’ll want to see that steps have been taken to demonstrate that colleagues in your organisation have had training on IR35, processes you have in place in your HR and talent acquisition teams are effective in identifying in and out of scope assignments, and any recruitment suppliers you work with are implementing Status Determination Statements correctly.
Understanding your IR35 responsibilities as an End Client
The Basics of IR35
IR35 is a piece of legislation designed to combat tax avoidance by contingent workers operating through Personal Service Companies (PSC). Where historically it was the PSC worker’s responsibility to determine their tax status for assignments they completed, IR35 has taken this responsibility away from the workers and moved it to the End Client, the company who the work is being delivered to. This means that organisations now need a good understanding of working practices, how the relationship will work and who is responsible for what. For example, will the PSC worker be providing their own equipment, or will they be using the client’s tools? When it comes to annual leave, will the contingent worker be required to request permission from the client to take time off?
Where contingent workers operate out of scope of IR35, they are deemed to be delivering a service to the End Client, how they deliver that service is for them to decide. This includes providing adequately trained substitutes to work on their behalf when they are unavailable or notifying the End Client when they will be on leave without needing permission first. Out of scope contingent workers will also typically deliver their services against pre-agreed milestones, where they are left to determine how best to complete the work, with little direction or control from the End Client.
It’s important for organisations to understand how IR35 is assessed, to know the questions they need to be asking to make accurate Status Determination Statements. This may include looking at any changes they can make to working practices to help provide clear differentiation between in and out of scope assignments. For organisations working across various industry sectors, these processes might look very different depending on the security levels or regulatory requirements.
Responsibilities of End Clients Under IR35 Legislation
Once the End client has created the Status Determination Statement (SDS), they are required to pass it down the supply chain, to ensure all parties understand the outcome and can apply it to their contingent worker’s assignment.
Should the worker, or anyone else in the chain such as the Fee Payer, wish to challenge the SDS a clear Status Disagreement Process needs to be put in place. The End Client must respond within 45 calendar days, and the existing in or out of scope determination will remain in place during the investigation period. Where the outcome of the review changes the IR35 status, a new SDS must be created and passed down to all parties in the supply chain.
Assessing and managing the risks associated with IR35
Identifying high-risk areas in your organisation
Effective IR35 management begins with identifying areas within your organisation where non-compliance risks might reside. Companies that employ multiple contingent workers through various recruitment suppliers must scrutinise how their agencies are approaching IR35 as well as looking at internal processes. Does each party involved fully understand their responsibilities? How are IR35 assessments performed? What checks are in place? Are blanket decisions being taken on groups of workers operating in a similar way? Each assignment requires its own Status Determination Statement, but they can only be accurate when there is adequate training on IR35 and a solid understanding of working practices.
Practical ways to mitigate IR35 risks
Identifying any areas of concern can be difficult to spot when you’re in the day-to-day details, which is why we always recommend engaging an external consultancy to make an independent review of how IR35 is being managed within your business and any risks that need immediately addressing.
Risk mitigation requires an IR35 review of current contracts and working practices with contingent workers as well as an audit of your recruitment supply chain. Documentation needs to reflect everyday processes and staff training needs to be evidenced to demonstrate reasonable care has been taken to manage IR35 within your organisation.
Developing an IR35 Strategy that’s right for your business
Internal processes: are they fit for purpose?
Having robust internal processes means your business is better equipped to make accurate IR35 determinations. For IR35 compliance, it’s not just about having processes in place; it’s also about the clarity and consistency of those processes across all business units and supply chain stakeholders.
Training and awareness for staff involved in IR35
For HR, talent procurement teams, and hiring managers, understanding IR35 is fundamental to compliance. Linx provides IR35 compliance solutions that include comprehensive reviews of staff training, pinpointing knowledge gaps, and offering training programmes that elevate your team’s understanding and decision-making ability.
Conducting supply chain audits
Your recruitment supply chain is a critical element in ensuring IR35 compliance. Regular audits can identify conflicts, and highlight changes required to maintain IR35 compliance.
Taking control of IR35 compliance across your supply chain
For businesses who already have an IR35 strategy in place devised when the off-payroll working rules were extended to the Private Sector in 2021, it’s crucial to ensure this is still being actioned correctly and whether the approach continues to be right for your business.
Changes within your business operations, functional departments and new personnel within your business or your supply chain, may have resulted in small changes to working practices and how existing IR35 processes are now being interpreted. That’s why we recommend undertaking periodical reviews of a company’s IR35 strategy, to ensure that what’s documented still reflects today’s operations. Changes in legislation also need to be monitored and, where appropriate, be reflected in processes and working practices, making it even more crucial to regularly review IR35 protocols.
Benefits of working with an external consultancy for IR35 compliance
Independent review and expert advice
HMRC want to see that organisations have taken reasonable care to manage IR35 within their business, and that steps have been taken to understand the off-payroll working rules. Engaging an independent partner such as Linx, can allow businesses to gain wider industry knowledge and best practice, whilst securing the support of external experts who are best placed to review your IR35 strategy and identify areas of risk and non-compliance.
Reducing the administrative burden
Comprehensive audits of IR35 processes to assess the accuracy of Status Determination Statements and working practices can take up significant time, tying up internal resources on lengthy reviews. Extensive training is also required to ensure they can adequately assess processes and identify areas of non-conformance, which adds additional duties and responsibilities to often already busy HR and talent acquisition teams.
Our role at Linx is to bring an independent perspective that can proactively manage IR35 compliance whilst alleviating the administrative burden. Through independent IR35 reviews and sharing of best practice, we can help your business address any compliance challenges with strategies that are proven.
Tailored services around your business needs
Our Linx IR35 specialists don’t just provide a one-size-fits-all solution; they offer a range of services based on the needs of our clients. Whether that’s supply chain auditing to understand how IR35 is being managed, extensive reviews of internal processes or an assessment on staff training to identify any knowledge gaps and additional learning required.
They’ll work with you to assess the key areas they recommend tackling first, before devising a tailored plan that best fits your business’s IR35 concerns.
CONTACT US
If you need support to manage IR35 within your workforce or supply chain, then our team are happy to help.