Mastering IR35 Compliance: What You Need to Know

Since the implementation of off-payroll working legislation (commonly known as IR35) in the private sector in 2021, companies have had to fundamentally alter the way they engage independent contractors through Personal Service Companies (PSCs).  

HMRC, the UK’s tax, payments and customs authority, is actively gathering information on how organisations have implemented and enforced their off-payroll compliance policies—using its expanded access to workforce data, audit authority, and penalty structures for enforcement.  

As your IR35 programme has matured, you may have moved past the early preparation phase and into a period of ongoing review. Regular internal audits and periodic evaluations of your IR35 compliance posture play a vital role in your organisation’s long-term success.  

To support your compliance efforts and help your workforce succeed, we’ve provided key considerations to strengthen your IR35 strategy. 

How Do You Create a Successful IR35 Compliance Program?

Executive Mandate and Governance Oversight

Strong senior-level sponsorship is essential. Your organisation’s board or executive leadership must maintain visibility and accountability over your IR35 governance structure. This includes:  

• Appointing a contingent workforce compliance officer (or similar role) 
• Developing and implementing internal policies 
• Ensuring compliance teams are properly resourced 

Internal Audit and Compliance Review

Your organisation should regularly audit programmes, controls, and the IR35 status of incumbent contractors using a structured, documented process. All records must demonstrate that you have taken reasonable care, as outlined in HMRC guidance. 

An internal audit should cover:  

• Workforce segmentation by employment status 
• The application and outcomes of Status Determination Statements (SDS)  
• The rationale and supporting evidence for each classification 

Key Fact:  

• According to HMRC estimates, approximately 280,000 workers have been affected by the IR35 reforms.  
• Hiring businesses have transitioned between 150,000 and 200,000 workers from contractor status onto their own payrolls. 

Data Integrity and Workforce Visibility

A strong compliance programme requires clear visibility into your organisation’s contingent workforce practices. Since implementation, have you verified your original controls are still effective? This includes identifying off-payroll workers engaged through your Accounts Payable department or consultancy channels.  

To build on that, your organisation must maintain accurate, validated contractor datasets and implement comprehensive controls for contractor onboarding, classification, and supply chain transparency. 

Contractual and Operational Controls

Do your contracts reflect actual working practices?  Staying aligned with IR35 rules involves reviewing PSC engagement contracts regularly to ensure key IR35 indicators—control, substitution, and mutuality of obligation—are clearly addressed. 

It’s also necessary to ensure contract terms match your real-world practices. Discrepancies between these terms and actual work arrangements can attract scrutiny from HMRC. 

Key Fact: If your company violates IR35 rules—whether through non-compliance or negligence—you could face serious consequences. For example: back taxes, interest, fines up to 100% of the tax owed, and potential legal action.

Supply Chain Risk Management

All of your business relationships, from suppliers to partners, could carry potential risks. Verify that your suppliers—such as Managed Service Providers (MSPs), recruitment agencies, and consultancies—comply with IR35 rules to avoid unexpected liabilities. 

Equally important is managing risk across your entire supply chain. This includes conducting thorough due diligence on supply chain partners and holding them accountable through contract clauses, SLAs, and regular audits. 

Recordkeeping and Audit Documentation

HMRC enforcement actions often target insufficient documentation. Your organisation should keep complete records of: 

• IR35 determinations 
• Internal reviews 
• Contractor communications  
• Policy updates 

A centralized audit trail will help you defend your position in the event of an inquiry or investigation. 

Key Fact: HMRC can impose penalties of up to 100% of the tax owed if a misclassification occurs. 

• Careless errors: penalties typically range from 0–30% of the unpaid tax 
• Deliberate but not concealed: penalties range from 20–70% 
• Deliberate and concealed: penalties can be up to 100% 

Change Management and Training

Staying compliant with off-payroll regulations requires effective change management and comprehensive training. Your organisation needs a structured approach to handle the complexities of contractor engagement and classification.  

While initial training may have been provided during implementation, what ongoing education has your organisation delivered since? Maintaining a consistent framework for contractor engagement is crucial as regulations evolve. 

Ongoing Monitoring and Enforcement Preparedness

IR35 compliance is an ongoing commitment. Your organisation must implement ongoing monitoring practices, such as random spot-checks, periodic status reassessments, and trend analysis of determination outcomes.  

This is truly a team effort. Legal, HR, and tax teams must actively collaborate in managing escalations and addressing any identified risks. 

Key Facts:  

• £1.8 billion (€2.05 billion): Amount recovered by HMRC from non-compliance with off-payroll working rules as of 2024 
• 8,000 audits: Number of IR35 status checks conducted by HMRC in 2024, marking a 20% increase from 2023 

Learn More:

• How an Employer of Record Eases Global Hiring Challenges
• Driving Global Success Through Agent of Record Solutions

Where Can I Find More Information on IR35 Compliance?

IR35 enforcement is becoming stricter, and the consequences of non-compliance are significant. Organizations that neglect to review, audit, and document their compliance activities risk facing financial penalties, damage to their reputation, and disruptions to their operations. A strong compliance framework—complete with internal audits, supply chain due diligence, and continuous governance oversight—helps manage IR35 risk effectively. 

At MBO Partners, we simplify the complexities of IR35 by providing expert guidance on compliance and helping you accurately classify contractors to mitigate risk. We work with you to build a flexible workforce that meets your needs while staying aligned with evolving regulations. With our support, you can confidently engage independent professionals and optimise your workforce strategy. For more details, visit our IR35 page.