Receiving an HMRC IR35 compliance check letter does not mean the battle is lost. The outcome of most IR35 investigations is determined by the quality of evidence and the strategy adopted at the early stages. Getting this right from the start is the single biggest factor in achieving a good outcome.
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The IR35 enquiry process
An IR35 investigation typically begins with one of two triggers: a compliance check letter issued by HMRC’s Employment Status and Intermediaries team to the PSC (under Chapter 8 ITEPA 2003, old IR35) or to the engager or fee-payer (under Chapter 10, off-payroll working); or a broader PAYE audit of an engager that reveals off-payroll working issues within the contractor population.
The compliance check letter will identify the period under review and request information about specific engagements. Typical requests include: copies of contracts and statements of work; details of the working practices followed; evidence of substitution; information about other clients worked for during the period; and the results of any CEST determinations or other status assessments carried out at the time.
HMRC may follow this initial request with formal information notices under Schedule 36 Finance Act 2008, which carry legal force, non-compliance with a Schedule 36 notice can result in penalties. Once HMRC has reviewed the information provided, it will either close the enquiry (rare without some form of disclosure or explanation) or issue its view of the matter, typically stating that in its opinion the engagement(s) were inside IR35 and setting out its calculation of the resulting PAYE, NIC and penalty liability.
The three-stage defence
Stage 1: Contractual review
The written contract is the starting point. Does the contract, on its face, reflect an outside-IR35 engagement? Key terms to assess: whether it is a contract for services (not of service); whether it is deliverables-based rather than time-based; whether it contains a genuine unfettered substitution right; whether there is an express statement of no obligation to offer or accept work beyond the current statement of work; whether the contractor bears liability for defective work; and whether it expressly permits simultaneous work for other clients.
A contract that looks like an employment contract, specifying working hours, requiring personal attendance, giving the client direction over how work is done, is very difficult to defend even if the working practices are better. Conversely, a strong contract provides the framework for the factual evidence to build on.
Stage 2: Working practices evidence
Tribunals give greater weight to the factual reality of how the engagement operated than to the contractual terms where the two diverge. This is the most critical and most often neglected aspect of IR35 defence. The evidence needed includes:
- Project-based working: statements of work, deliverable sign-off records, project completion documentation;
- Multiple simultaneous clients: invoices to other clients during the same period, Companies House records of PSC accounts showing multiple income sources;
- Absence of control: emails and messages that show the contractor deciding how and when to perform the work, absence of supervision by client management;
- Substitution in practice: any correspondence where a substitute was offered or used or records of the right being genuinely available;
- Own equipment: receipts, asset registers, insurance documentation for specialist equipment used;
- Financial risk: fixed-price contracts, evidence of cost overruns absorbed by the contractor, defects liability records.
Stage 3: Challenging the SDS or HMRC determination formally
Under Chapter 10, a worker or agency may challenge an SDS through the statutory 45-day process (see our SDS guide). Under Chapter 8, where HMRC issues a formal IR35 determination, the taxpayer may appeal against it to the First-Tier Tribunal. The formal challenge process requires a written representation setting out the legal and factual arguments in detail, supported by the evidence gathered in stages 1 and 2.
Key evidence in an IR35 case
In our experience representing clients through IR35 investigations, the following categories of evidence are consistently the most influential:
- Emails demonstrating no day-to-day control: correspondence that shows the contractor planning and executing work autonomously, reporting by output rather than by time and making technical decisions without client approval.
- Invoices to multiple clients: contemporaneous invoices during the engagement period showing simultaneous work for different clients is powerful evidence against an employment characterisation.
- Substitution records: even one documented instance of a substitute being used or being offered and refused for a legitimate non-personal reason, materially strengthens the position.
- Project-based deliverables documentation: sign-off sheets, project reports and milestone payments demonstrate a fundamentally different relationship from employment.
- Absence of employment-style benefits: evidence that the contractor received no holiday pay, sick pay or pension contributions from the engager and was not included in the client’s employee communications.
The worst position is where the only evidence of working practices is what the engager and contractor say in interviews, without contemporaneous documentation, oral evidence is inherently less convincing, particularly where the relationship extended over several years.
Voluntary disclosure vs defending
Not every IR35 enquiry should be contested. A rational analysis weighs the cost of defence, professional fees, management time, tribunal costs and the irreversible stress of litigation, against the realistic probability of success given the evidence available.
Where the evidence of inside-IR35 working is strong, for example, a contractor who worked exclusively for one client for five years, attended their premises daily, was supervised by their line managers and used their equipment, an early voluntary disclosure that limits the period and demonstrates maximum cooperation will typically produce a lower overall cost than a contested defence that ultimately fails. The penalty reduction available for unprompted, fully cooperative disclosure can be very substantial.
Where the evidence genuinely supports outside-IR35 status or where HMRC’s view rests on a mischaracterisation of the working relationship, a defence is appropriate and, in the right cases, likely to succeed. The key is an honest, early assessment of the evidence before committing to a course of action.
The appeal route
Where HMRC issues a formal determination (under Chapter 8) or a notice of decision (under Chapter 10), the taxpayer has the right to appeal to the First-Tier Tribunal (Tax). The appeal must be made within 30 days of the determination or notice, after first requesting a statutory review by HMRC or opting out of the review process.
IR35 appeals before the First-Tier Tribunal are judge-alone hearings on the facts and law. The tribunal applies the employment status tests, starting with the Ready Mixed Concrete framework and applying subsequent case law, to the evidence. Both parties typically call witness evidence (the contractor, their clients, sometimes agency representatives) and may call expert evidence on employment status questions.
A risk to be aware of is HMRC’s power to issue follower notices under s74 Finance Act 2014. If HMRC considers that a tribunal decision in another case is a “relevant judicial ruling” that applies to a taxpayer’s arrangements, it can issue a follower notice requiring the taxpayer to take corrective action. Failure to comply leads to a 50% surcharge on the disputed tax. HMRC uses follower notices in IR35 cases after court of appeal decisions that it regards as settling the law in a particular direction.
For wider context on PAYE disputes and employment investigations, see our PAYE audits service and income tax investigations service.
HMRC settlement: what it means in practice
Most IR35 investigations are resolved by settlement rather than by tribunal decision. Settlement typically involves:
- Agreed tax liability: the amount of PAYE income tax, employee’s NICs and employer’s NICs that HMRC accepts is due across the years in dispute;
- Interest: statutory late payment interest calculated from the dates the PAYE should have been remitted;
- Agreed penalty: the penalty percentage applied to the unpaid tax, reflecting the behaviour category (careless or deliberate), whether disclosure was prompted or unprompted and the quality of cooperation.
Settlement does not require an admission that HMRC’s legal analysis was correct. It is a commercial agreement that closes the disputed periods. Where the evidence is mixed or where tribunal proceedings would be disproportionately expensive, settlement at a negotiated figure, particularly one that reflects maximum penalty abatement for cooperation, is a legitimate and often rational outcome.
The negotiation of the penalty percentage is where specialist representation adds the most measurable value: moving from a 40% to a 15% penalty on a £200,000 tax liability saves £50,000.
Frequently asked questions
How long does HMRC have to open an IR35 enquiry?
The time limits depend on the nature of the failure alleged. For self-assessment returns, HMRC has four years from the end of the tax year for innocent errors and six years for careless behaviour. Where HMRC can show deliberate behaviour, for example, that a contractor knowingly treated an inside-IR35 engagement as outside, HMRC has 20 years. For PAYE failures under Chapter 8, similar windows apply based on the nature of the failure. It is therefore possible for HMRC to investigate years going back over a decade.
Can I appeal an IR35 decision myself without a specialist?
You have the legal right to represent yourself before the First-Tier Tribunal. However, IR35 appeals are highly fact-intensive and legally technical. The outcome turns on the correct application of 60 years of employment status case law to a specific factual matrix. Preparing evidence bundles, drafting skeleton arguments and presenting oral evidence effectively all require specialist expertise. In our experience, unrepresented taxpayers are at a significant disadvantage and the cost of specialist representation is almost always less than the exposure if an appeal fails unrepresented.
What is the difference between settling an IR35 case and winning it?
Settling means agreeing with HMRC on the tax, interest and penalties due without a formal tribunal determination. Settlement does not involve an admission that HMRC’s position was correct, it is a commercial resolution of a disputed position. Winning means the tribunal finds in your favour. Settlement is faster and avoids tribunal costs and uncertainty; winning provides no financial liability but involves litigation risk and cost. The choice depends on the strength of the evidence, the sums at stake and the client’s commercial priorities.
Will HMRC always accept a voluntary disclosure before opening an enquiry?
A voluntary disclosure, reporting and paying a liability before HMRC has opened an enquiry, is treated as unprompted disclosure, which attracts lower penalty rates than a prompted disclosure made after HMRC has started investigating. Voluntary disclosure does not prevent HMRC from opening a formal enquiry, but it substantially reduces penalty exposure and demonstrates cooperation. HMRC weighs cooperation heavily in penalty negotiations.