⚠️ Investigation

An IR35 investigation by HMRC can be triggered at any time and can look back at multiple tax years. If HMRC investigates and finds that engagements were inside IR35 when treated as outside, the financial consequences can be severe: back-taxes, NI, interest, and penalties. Preparation is everything.

What triggers an IR35 investigation?

HMRC uses a range of factors to identify contractors for investigation, including:

  • Long-term engagements with a single client (particularly over 2 years)
  • Contractor behaviour that resembles employment (regular hours, same workplace, line management role)
  • Information from a third party (e.g., a former client or employee making a complaint)
  • Inconsistencies in your tax returns
  • Sector targeting (HMRC has historically focused on banking, IT, and public sector)
  • Random enquiry under HMRC's general enquiry programme

What HMRC will ask for

During an investigation, HMRC will typically request:

  • Copies of all contracts with the relevant client(s)
  • Invoices and payment records
  • Correspondence with the end client
  • Evidence of your working arrangements (timesheets, emails, project documents)
  • Evidence of substitution, financial risk, and independent business activity
  • Your PSC's accounts and bank statements

Building your evidence file

The best time to build an evidence file is before any investigation begins. Maintain the following records for all engagements:

  • Contracts: Keep signed copies of all contracts, including any amendments. Ensure they contain an explicit substitution clause, a clause stating no obligation to offer or accept work, and language limiting the client's control over how work is done.
  • Working practices diary: Keep brief notes on how you actually work (your own hours, use of your own equipment, working from your own premises, freedom to work for other clients).
  • Substitution evidence: If you have ever sent a substitute, keep a record. If substitution has never been used but the right exists, correspondence confirming this can help.
  • Multiple client evidence: Invoices and contracts showing you work for more than one client at a time.

IR35 insurance

Several specialist insurers offer IR35 investigation insurance, which covers the legal and accountancy costs of defending an HMRC enquiry. Some policies also cover the tax liability itself. Reputable providers include Qdos and IPSE (the Association of Independent Professionals and the Self-Employed). If you are operating outside IR35, this cover is worth serious consideration.

Do not ignore an HMRC enquiry letter

If you receive an IR35 enquiry letter from HMRC, do not respond without specialist advice. Appoint a qualified tax adviser or IR35 specialist immediately. What you say in early correspondence can significantly affect the outcome.

What happens if HMRC wins?

If HMRC successfully argues your engagement was inside IR35, you will owe:

  • PAYE Income Tax on the deemed employment income
  • Employer's and employees' NI (employer's NI at 15% from 2025/26)
  • Interest on unpaid tax (currently Bank of England base rate plus 2.5%)
  • Penalties if HMRC deems the error was careless or deliberate
Disclaimer

This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our accountant directory.