The Enduring Complexities of IR35

Many agree that IR35 as a tax law may be flawed, but it cannot be ignored. Since its introduction, IR35 has been marked by the good intention to ensure everyone pays their fair share of tax. Unfortunately, IR35 has spectacularly failed to achieve the hallmarks of sound tax legislation. Good tax law should be fair, straightforward, consistently enforceable, and sensitive to the legitimate commercial practices of the different sectors it affects. Unfortunately, IR35 lacks any of these qualities.

The Intent and Reality of IR35

The central aim of IR35 is not to undermine the commercial rationale for engaging specialist contractors on short-term assignments, though this is often the outcome in practice. Rather, IR35 seeks to counteract the considerable tax advantages gained when individuals offer their services via personal service companies (PSCs), where the nature of the work essentially constitutes disguised employment.

Unfortunately, we have encountered over the years too many contractors whose thinking unrealistically leans towards believing IR35 does not apply to their contractual arrangements, when all the legally accepted hallmarks of employment are pointing to one of disguised employment instead of the desired status of being self-employed. We suggest that when it becomes impossible to distinguish between the behavior of an employee and a contractor arrangement, commonsense dictates you take a pragmatic and prudent approach. In other words, if you look like a duck; walk like a duck; and quack like a duck; then the HMRC can be expected to conclude you are a duck, and accept IR35 applies to your situation. To do otherwise is to invite the HMRC to investigate you and raise a back-duty assessment that will ruin your day.

Why compliance advice remains essential

Despite its shortcomings, IR35 remains in force and requires our clients to seek expert guidance on meeting its requirements. Our advisory role has been somewhat simplified since the 2016 Finance Act, which taxed dividends received by individuals under personal self-assessment. This move significantly diminished the primary tax-saving advantage of trading through a PSC, as extracting profits by dividends became less attractive due to double taxation. As a result, PSC directors have become more willing to take profits as salary, aligning their income with the tax treatment of IR35-related arrangements. This shift effectively mandated IR35 compliance through indirect means.

We do not see our role as tax advisers is to support lame duck arguments for treating PSC earnings as being outside the scope of IR35. We have seen the financial damage an adverse HMRC investigation can have on individuals who foolishly pushed their luck too far. We would never wish to see one of our clients suffer the same fate.

Public Sector and Private Sector Developments

In April 2017, the responsibility for determining IR35 status shifted to public sector bodies, making them liable for unpaid taxes if they failed to apply the rules correctly. This led to several government departments and local authorities facing substantial IR35 back-duty assessments and penalties after HMRC investigations. The inability of the public sector to consistently comply with IR35 cast doubt on the feasibility of broader compliance, making the government’s decision not to repeal IR35 all the more disappointing.

In April 2021, similar amendments extended IR35 obligations to the private sector. Medium and large sized companies became responsible for determining the IR35 status of contractors, with liability for any unpaid tax resting with them if they erred. As a precaution, many larger businesses adopted a blanket approach, treating all engagements as inside IR35, regardless of the true circumstances. This led to higher compliance rates among high-value contractors.

Public Sector and Private Sector Developments

This progress was partly undone in April 2025, when the thresholds for defining a "small" company were raised. The new criteria are:

• Turnover: Up to £15 million (previously £10.2 million)
• Balance sheet total: Up to £7.5 million (previously £5.1 million)
• Number of employees: 50 or fewer (unchanged)

As a result, many contractors now once again bear the responsibility for determining IR35 status and settling any back-duty if they make mistakes. This shift places the burden of compliance squarely back on the shoulders of smaller companies and individual contractors.

Compliance Enforcement in the Age of Perfect Information

It is important to consider the implications of the HMRC now possessing detailed information about taxpayers. Investigations are rarely launched without prior indications of non-compliance. Since April 2019, many PSCs have been submitting quarterly VAT returns and monthly payroll data, granting HMRC access to comprehensive insights into how they operate in reality. HMRC can now easily identify PSCs with high incomes and low salaries, making them prime candidates for IR35 investigations.

For directors of PSCs, it is crucial to recognise that, while IR35 compliance may allow for interpretation, relying on the assumption that HMRC lacks the resources to investigate and challenge how they have complied with the rules is becoming increasingly risky. The historical approach of 'playing the numbers game' in the hope they will never be investigated is no longer a sensible choice (if it ever was). With the data now available, HMRC can efficiently target likely IR35 breaches, and open investigations that will achieve the high rates of unpaid tax recovery that motivates them to intervene this way.

The need to take good tax advice and comply with IR35 has never been so important, because the chances of being called to account has never been higher.

Further reading

April 2026 will see umbrella companies being subject to new HMRC rules

The latest HMRC guidance on off-payroll working regulations can be found here.