IR35 legislation is a critical part of the UK tax system, designed to determine whether a contractor is genuinely self-employed or effectively working as an employee for tax purposes. The rules, officially known as off-payroll working rules, have significant implications for both contractors and businesses. Compliance with IR35 is essential to avoid penalties, fines, and unexpected tax liabilities.

Despite its importance, many UK businesses make mistakes when performing IR35 checks, leading to increased risk of non-compliance. Understanding these common errors, why they happen, and how to avoid them is vital for any organisation engaging contractors. Providers such as The Infinity Group specialise in managing IR35 compliance, offering expert guidance and support for businesses and contractors alike.

This article explores the most frequent mistakes during IR35 checks, provides practical solutions to avoid them, and outlines best practices for ensuring full compliance with HMRC regulations.

Understanding IR35 and Its Importance

IR35, introduced in 2000, targets tax avoidance by identifying contractors who are essentially employees in all but name. If a contractor is deemed “inside IR35,” the business or client must deduct income tax and National Insurance contributions as if the contractor were a regular employee. Contractors outside IR35 are treated as self-employed and are responsible for managing their own tax liabilities.

For businesses, accurately assessing IR35 status is crucial because HMRC can hold the client responsible for unpaid taxes if a contractor is wrongly classified. Non-compliance can result in penalties, interest on unpaid taxes, and reputational damage.

IR35 checks are typically performed through a combination of contract reviews, working practices assessment, and evaluation of the relationship between the contractor and the client. Despite clear guidance from HMRC, mistakes are common, particularly in complex sectors such as IT, construction, and professional services.

Common Mistakes Businesses Make During IR35 Checks

1. Misunderstanding the Rules

One of the most frequent mistakes is misunderstanding how IR35 operates. Many businesses incorrectly assume that hiring a contractor automatically places them outside IR35 or that a contractor’s limited company status guarantees self-employment status.

IR35 status depends on the actual working relationship, not solely the contract wording. Factors such as control, substitution rights, and mutuality of obligation are critical. Misinterpreting these criteria can lead to incorrect classification and non-compliance.

2. Relying Solely on Contracts

Contracts are important, but they do not determine IR35 status on their own. HMRC emphasises that the real-world working practices of the contractor are the deciding factor. Businesses often make the mistake of assuming a well-drafted contract is sufficient, without assessing how the contractor operates day-to-day.

For example, if a contractor is required to work fixed hours under direct supervision, this may indicate employment, even if the contract states they are self-employed. Providers like The Infinity Group assist businesses in evaluating both contracts and actual working practices to ensure accurate IR35 assessments.

3. Ignoring Working Practices

Closely related to contract reliance is the failure to assess working practices. Businesses may overlook:

• The level of control exercised over the contractor.

• Whether the contractor can send a substitute to complete work.

• Whether the contractor is integrated into the organisation like an employee.

• Mutuality of obligation, i.e., whether the business is obliged to provide work continuously.

Neglecting these factors can lead to incorrect IR35 status determinations and potential HMRC scrutiny.

4. Inconsistent Assessments

Another common error is inconsistency in performing IR35 checks across different contractors or projects. Some businesses assess only new contractors while ignoring existing ones. Others apply different criteria for similar roles.

Inconsistent assessments increase the risk of non-compliance and can attract penalties. Implementing a standardised IR35 review process helps ensure all contractors are evaluated fairly and consistently.

5. Failure to Document Decisions

Businesses often fail to maintain proper documentation of IR35 checks. Without a clear record of assessments, HMRC may challenge the business, and there will be no evidence to justify the classification decisions.

Documentation should include:

• Contract reviews

• Working practice evaluations

• Decision rationale

• Communications with the contractor

Providers like The Infinity Group ensure that all IR35 assessments are fully documented, reducing the risk of disputes and audits.

6. Overlooking Changes in Work Arrangements

IR35 status is not static. Changes in a contractor’s role, responsibilities, or working conditions can affect their status. Some businesses make the mistake of assessing IR35 once and assuming it applies indefinitely.

Regular reviews are necessary to account for changes in project scope, reporting lines, or contract terms. Failure to update assessments can result in non-compliance.

7. Misinterpreting Substitution Rights

Substitution is a key factor in IR35 assessment. If a contractor can send a suitably qualified substitute, it suggests they are genuinely self-employed. However, businesses often misinterpret substitution clauses or fail to consider whether the substitution is practical in reality.

HMRC examines both the contractual right to substitute and whether it is exercised or enforceable. Misjudging this aspect can lead to an incorrect “inside IR35” classification.

8. Ignoring Mutuality of Obligation

Mutuality of obligation (MOO) refers to the expectation that the client provides work and the contractor accepts it. High MOO indicates an employment relationship, while low MOO suggests self-employment.

Many businesses fail to assess MOO accurately, assuming that the contractor’s limited company status automatically limits obligations. A careful review of work expectations and contractual terms is required.

9. Inadequate Use of IR35 Assessment Tools

HMRC provides tools such as the Check Employment Status for Tax (CEST) tool to assist with IR35 assessments. However, some businesses rely solely on these tools without considering nuanced factors. CEST is a helpful starting point, but it may not capture all details of working arrangements.

Professional providers, including The Infinity Group, offer expert interpretation of assessment tools, ensuring decisions are supported by legal and practical considerations.

10. Failing to Communicate Decisions to Contractors

Communication is often overlooked. Contractors should be informed of IR35 status decisions, how they were made, and any implications for tax or payroll. Failing to communicate creates confusion, reduces transparency, and can lead to disputes or dissatisfaction.

11. Neglecting Payroll and Tax Implications

Once a contractor is deemed inside IR35, the business or client is responsible for deducting income tax and National Insurance contributions. Some businesses make the mistake of not integrating IR35 decisions with payroll, leading to incorrect deductions or delayed compliance.

12. Lack of Expert Support

Finally, many businesses attempt to perform IR35 checks without specialist knowledge. Given the complexity of UK tax law, relying solely on internal teams increases the risk of mistakes. Partnering with experienced providers like The Infinity Group ensures that IR35 assessments are accurate, up-to-date, and fully compliant with HMRC rules.

How to Avoid Common IR35 Mistakes

1. Educate Your Team

Provide training for HR, finance, and procurement staff responsible for managing contractors. Understanding IR35 legislation, key factors, and assessment procedures reduces errors.

2. Standardise Assessment Processes

Implement a consistent process for reviewing contracts and working practices. Use templates, checklists, and clear criteria to ensure all contractors are assessed fairly.

3. Document Everything

Maintain detailed records of all IR35 assessments, including contracts, working arrangements, decision rationale, and communications with contractors. Documentation supports compliance in the event of an HMRC enquiry.

4. Review Regularly

Conduct periodic reviews of IR35 status for all contractors. Consider changes in roles, project scope, and working arrangements. Regular updates prevent misclassification and reduce compliance risks.

5. Seek Professional Guidance

Engage specialists with experience in IR35 compliance. Providers like The Infinity Group offer comprehensive services, including:

• Contract and working practice reviews

• Accurate status determination

• Integration with payroll systems

• HMRC audit support

Professional support ensures assessments are accurate, legally defensible, and aligned with best practices.

6. Communicate Decisions Clearly

Inform contractors of IR35 decisions, the rationale behind them, and any implications for payroll or tax. Clear communication promotes transparency and reduces disputes.

7. Integrate with Payroll

Ensure that IR35 determinations are reflected accurately in payroll processes, including tax and National Insurance deductions. Integration prevents errors and ensures compliance.

8. Use Reliable Assessment Tools

While HMRC’s CEST tool is useful, combine it with expert review and practical evaluation of working practices. This ensures a comprehensive and accurate assessment.

Benefits of Avoiding IR35 Mistakes

• Compliance with HMRC: Accurate assessments reduce the risk of fines and penalties.

• Financial clarity: Correct tax deductions and liabilities prevent unexpected costs.

• Improved contractor relationships: Transparent communication builds trust with contractors.

• Operational efficiency: Consistent processes reduce administrative burden and errors.

• Audit readiness: Detailed documentation supports defence in case of HMRC investigation.

Conclusion

IR35 compliance is a critical issue for UK businesses engaging contractors. Common mistakes, such as misinterpreting contracts, ignoring working practices, inconsistent assessments, and lack of documentation, can lead to significant financial and operational consequences.

Avoiding these mistakes requires education, standardised processes, regular reviews, clear communication, and expert support. Providers like The Infinity Group offer comprehensive IR35 services, helping businesses assess contractor status accurately, integrate decisions with payroll, and maintain full compliance with HMRC rules.