IR35 has been a part of the contracting landscape since 2000, however, HMRC’s approach to enforcing the legislation has changed overtime. For contractors, understanding how an IR35 investigation works under Chapter 8 legislation, and what HMRC looks for, can make a significant difference to compliance.
Our guide below, created in collaboration with Markel Tax, explains the HMRC IR35 investigation process for a contractor, helping you to prepare, respond, and protect your business.
Understanding IR35 as a contractor
IR35 is designed to identify disguised employment, where a contractor works like an employee but operates through a limited company. If HMRC believes your engagement resembles employment, they may investigate to determine whether the IR35 legislation applies.
For contractors, IR35 affects how you negotiate contracts and extract money from your company, how you manage client relationships, and how you demonstrate that you operate as a genuine business, and knowing where you stand can help you to work with confidence and avoid unnecessary risk.
Visit our dedicate article for an in-depth explanation of what IR35 is.
Why do HMRC investigate contractors?
Most investigations by HMRC begin when something in a tax return, contract history, or working practices suggests that an engagement might fall inside IR35. This could be a long‑term contract with a single client, a role that resembles an employee position, or inconsistencies between your contract and how you actually work. HMRC are able to review data from agencies and end clients, so if any mismatches are found between what you report and what they report, this can trigger a review.
Some sectors, such as IT, engineering, and financial services, often see more scrutiny as they rely heavily on contractors.
HMRC IR35 investigation process
A HMRC IR35 investigation typically follows the same process, as outlined below by GOV.UK:
Initial letter requesting information
An IR35 investigation usually begins with a formal letter from HMRC, requesting information so HMRC can understand the nature of your engagement. Typically, they will ask for copies of your contracts, details about the services you provide, and information about how your business operates. You will also be given a deadline to respond and must carefully put together an initial reply to help influence how the rest of the enquiry unfolds.
Review of contracts and working practices
Once HMRC receives your documents, they will compare the written contract with the actual working practices. This is a crucial stage as HMRC typically places more weight on how you work day‑to‑day than on what the contract says. They will look at factors such as control, substitution, and mutuality of obligation, as well as whether you behave like a genuine business – any inconsistencies between the contract and reality may prompt further questions.
Questions about working arrangements
HMRC regularly send a list of detailed questions to gather more information about your working relationship with the client. These questions typically focus on practical aspects of the engagement, such as whether a right of control exists over how you undertake your work, whether you can refuse tasks, how you manage your time, and whether you use your own equipment. The answers will then build a picture of whether you operate independently or in a way that resembles employment.
Requests for meeting
HMRC may request an in-person meeting or telephone interview to discuss your working practices, which you are not legally required to attend, although you are obliged to provide any information requested. Many advisers recommend that you keep communication in writing to avoid any misunderstandings and to ensure you have a clear record of what has been said. However, if you do choose to attend a meeting, having an IR35 specialist or adviser present will help you to guide the discussion.
Client interviews
HMRC may also contact your client directly to verify the information you have provided. They will ask about your role, how you deliver your services, and the level of autonomy you have, which is why it is important that your client understands the nature of the engagement and is prepared to confirm it accurately. Any discrepancies between what you and your client say can potentially complicate the investigation.
HMRC’s provisional view
After reviewing all the evidence, HMRC will issue a provisional view of your IR35 status. This is not the final decision but an indication of how they currently interpret the facts. They may state that they believe the engagement falls inside IR35, or they may accept that it is outside. At this stage, you will have the opportunity to respond, explain any misunderstandings, or provide additional evidence.
Opportunity to challenge or provide further evidence
If you disagree with HMRC’s provisional view, you can challenge it. This is your chance to present further documentation, explain working practices in more detail, or highlight evidence that HMRC may have overlooked. Many cases are resolved at this stage when contractors provide clear, consistent information that supports their position – professional representation can be particularly valuable here.
Final determination
Once HMRC has considered all the evidence and any challenges you have made, they will issue a final determination. This will set out their conclusion on your IR35 status and, if they believe the rules apply, the tax and National Insurance contributions they think are owed. You still have the right to appeal this decision through internal review, Alternative Dispute Resolution, or a tax tribunal if necessary.
How to reduce IR35 risk as a contractor
Proactive compliance is the most effective way to protect yourself, such as regularly reviewing contracts, ensuring there is clear confirmation of working practices, and maintaining evidence of autonomy to help demonstrate that you operate outside IR35. Contractors who operate like genuine businesses, by marketing their services, securing insurance, and investing in equipment, are less likely to face challenges.
IR35 insurance can also provide valuable protection, covering defence costs and, in some cases, tax liabilities.
Frequently asked questions
How long does an IR35 investigation last?
Most investigations last for several years, even if it is a less complex case.
Can HMRC contact my client?
Yes, during most enquiries HMRC will contact clients to verify working practices.
Does the written contract matter?
Yes, the written contract does matter, however working practices can significantly impact determining IR35 status.
Can HMRC investigate past contracts?
Yes, depending on the circumstances, they can look back up to twenty years where they believe tax evasion or fraudulent behaviour has taken place.
Discover our knowledge centre for more help and guidance or read more about Caunce O’Hara’s contractor insurance.
Please note: This article provides guidance for information purposes only. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Caunce O’Hara. Caunce O’Hara is not affiliated with any of the brands, companies or websites mentioned in this article.
