The IR35 Status Determination Matters
Under the off-payroll working rules, if you're working for a medium or large private sector client, they should have provided you with a Status Determination Statement before you started work.
That SDS is crucial evidence. If they determined you were outside IR35 and you worked according to that determination, it shifts liability away from you. Keep every SDS you've ever received.
If you disagreed with an SDS and raised it through the client's dispute process, keep records of that too. It shows you were actively monitoring your status, not just hoping for the best.
For contracts started before the off-payroll rules applied, or for small clients exempt from the rules, you should have done your own status determination. If you didn't, do one now using HMRC's Check Employment Status for Tax (CEST) tool and keep the result.
Building Your Defence Before You Need It
Smart contractors don't wait for HMRC to come calling before building their defence. They create an audit trail as they go.
Keep a work diary. Not detailed minute-by-minute logs, but notes about significant decisions you made, times you exercised control over your work, occasions where you worked remotely or set your own schedule.
Save emails that demonstrate the nature of your working relationship. You turning down work, you negotiating rates, you deciding how to approach a problem—these all support outside IR35 status.
Document your business development activities. Networking events attended, proposals sent to potential clients, marketing materials created. Employees don't do business development.
Keep evidence of financial risk. Proposals that didn't convert, unbillable time spent on admin, equipment you purchased that wasn't reimbursed. True contractors carry financial risk that employees don't.
What Happens During an IR35 Investigation
The process typically starts with an information request. HMRC asks for specific documents—contracts, accounts, details of your working arrangements.
You'll have 30 days to respond, though you can request extensions if you need more time to gather evidence. Don't ignore these letters. Failure to respond makes everything worse.
HMRC will review what you've sent and usually come back with more questions. They might want to interview you, either over the phone or in person. These meetings are not casual chats—everything you say can be used to assess your tax position.
The investigation process typically takes 12 to 36 months, sometimes longer. During this time, you'll be racking up accountancy and legal fees. This is where IR35 insurance earns its keep if you have it.
Throughout, HMRC is comparing what your contracts say against how you actually worked. Discrepancies are a problem. If your contract says you control your hours but you consistently worked 9-5, that's evidence against you.
When to Get Professional Help
The minute you receive an investigation letter, contact your accountant. If they're not an IR35 specialist, find one who is. General accountants often don't have the specific expertise these cases require.
You'll likely need a combination of accountancy support and legal advice. Some investigations are purely technical—working out the tax treatment. Others become legal disputes about employment status. Know when you need a barrister, not just an accountant.
Don't try to handle HMRC correspondence yourself. You might think you're being helpful or cooperative, but you can accidentally say things that undermine your position. Let specialists who understand IR35 case law handle the communication.
The cost hurts, but it's far less than losing a case that could have been won with proper representation.
IR35 Compliance From Day One
The best way to
prepare for an IR35 audit is to operate compliantly from the start and keep meticulous records.
Before taking any contract, have it reviewed by an IR35 specialist. The few hundred pounds this costs could save you tens of thousands later.
Make sure your actual working practices match what your contract says. If your contract gives you control but you're actually taking instructions like an employee, the contract is worthless.
Keep everything. Emails, invoices, receipts, timesheets, meeting notes. Storage is cheap, investigations are expensive.
Review your IR35 status annually, particularly if your working arrangements change. A contract that was outside IR35 at the start might drift inside if you stop exercising your rights.
Settling With HMRC
If HMRC's investigation concludes you should have been inside IR35, you'll face a tax bill covering the periods investigated, plus interest and potentially penalties.
You have options. You can accept their determination and pay. You can negotiate—HMRC sometimes agrees to reduced settlements, particularly if there's genuine dispute about status rather than clear-cut avoidance.
Or you can appeal to tribunal. This is expensive and risky, but if you're confident in your position and have strong evidence, you might win. Recent tribunal cases show contractors can and do successfully defend their outside IR35 status.
If you do settle, make sure the settlement agreement is clear about which years are covered and whether HMRC accepts your status going forward. You don't want to pay up and still face uncertainty about future contracts.
IR35 investigations are stressful and expensive, but they're survivable if you've done things properly and kept records.The contractors who struggle are those who've genuinely been working like employees while paying tax like business owners, or those who kept no evidence of their working practices.
If you can demonstrate you genuinely controlled your work, took financial risk, and operated like a business rather than an employee, you'll likely be fine. The records you keep today are your insurance policy tomorrow.
Don't wait for HMRC to come knocking before you think about this. By then, it's too late to create the evidence trail you needed.
