IR35 in 2026: HMRC’s Enforcement Is Escalating — Here’s How to Keep Clients Compliant

IR35 is not a new risk, but the enforcement environment in 2026 is more active than it has been at any point since the off-payroll working rules were extended to the private sector in April 2021. HMRC has openly stated its intention to use data-matching and automated risk tools to identify non-compliant arrangements at scale — reducing its reliance on time-intensive individual investigations and increasing the volume of cases it can pursue. For practices with clients on either side of the IR35 question — end clients determining the status of contractors, or contractors working through personal service companies — the current environment warrants a careful review of existing arrangements.

The Current IR35 Framework in Brief

IR35 applies where an individual provides services to a client through an intermediary — typically a personal service company (PSC) — and where, if the intermediary did not exist and the individual worked directly for the client, the engagement would be employment for tax purposes. Where IR35 applies, the income from that engagement is treated as employment income and is subject to PAYE and NIC.

Since April 2021, the responsibility for determining whether IR35 applies (the “status determination”) rests with the end client for medium and large businesses, not with the PSC. The end client must issue a Status Determination Statement (SDS) to the contractor and the fee-payer in the chain. Where an end client determines that a contractor is “inside IR35”, the fee-payer (typically the agency or the end client directly) must deduct PAYE and NIC before paying the contractor’s PSC.

For small businesses — defined by the Companies Act criteria (two of: turnover below £10.2 million, balance sheet below £5.1 million, fewer than 50 employees) — the responsibility for determining IR35 status rests with the PSC itself, as it did before 2021. Following the 2026/27 threshold increases, more businesses will qualify as small and fall outside the off-payroll working rules. This means more PSC contractors are once again self-determining their status, and HMRC’s scrutiny of those self-determinations has increased correspondingly.

What HMRC’s Enforcement Focus Looks Like in 2026

HMRC’s approach to IR35 compliance has shifted from reactive (investigating following tip-offs or random selection) to proactive (using data analytics to identify patterns suggesting non-compliance). The key indicators HMRC is looking for include: PSC contractors whose single-client income represents the majority of their company’s receipts across multiple years; patterns of dividends from PSCs with minimal employment income; and mismatches between PAYE filings, self-assessment returns, and company accounts.

HMRC has also been cross-referencing contractor arrangements with the employers that engage them. End clients in the medium and large category are being asked to demonstrate that they have issued Status Determination Statements, applied reasonable care in their determinations, and have processes to review status where the contractual or working arrangements change.

The April 2026 umbrella company reforms have added a further layer of complexity. The heightened scrutiny of umbrella arrangements — and the joint liability rules that now apply to agencies — has prompted some agencies to move workers onto direct employment or onto the agency’s own payroll. For PSC contractors previously operating alongside umbrella-engaged workers in the same supply chain, the overall compliance environment has tightened.

The Employment Status Tests: What Still Matters

The employment status tests used to determine whether IR35 applies are the same tests used to determine employment status generally: mutuality of obligation, control, personal service, financial risk, integration, and the overall picture of the relationship. No single factor is determinative.

Employment Status Test Factors: What’s Weighted?

The factors that HMRC and tribunals have consistently weighted most heavily are:

Control. Does the client control how, when, and where the work is done? If a contractor can genuinely determine their own working methods and hours, that points toward self-employment. If the client directs the work in the same way as it would an employee, that points toward employment.

Personal service and substitution. Can the contractor send a substitute? A genuine, unrestricted right of substitution — not a right that requires client approval or has never been exercised — points toward self-employment. A clause in a contract purporting to allow substitution but which does not reflect the actual working arrangement carries little weight with HMRC.

Mutuality of obligation. Is the client obliged to offer work and the contractor obliged to accept it? A long-running engagement with a consistent stream of work from one client, where both parties expect the relationship to continue, begins to look like employment.

Financial risk. Does the contractor bear real financial risk — can they make a loss, do they invest in their own equipment, do they have their own professional indemnity insurance for work performed? Genuine financial risk points toward self-employment.

BrightPay processes PAYE for contractors determined to be inside IR35, applying the correct tax and NIC treatment on payments made to PSCs where the fee-payer deduction rules apply. For bureaus running payrolls for end clients engaging contractors, BrightPay handles the off-payroll working calculation alongside the rest of the payroll run.

BrightCIS is Bright’s solution for the Construction Industry Scheme — relevant for construction sector clients where contractor arrangements frequently overlap with both CIS obligations and IR35 considerations, particularly where subcontractors are engaged through PSC or umbrella structures.

Status Determination Statements: Getting the Process Right

For end clients required to issue Status Determination Statements, the key compliance requirements are: the SDS must be issued to both the contractor and the fee-payer; it must provide reasons for the determination; and the end client must have taken “reasonable care” in reaching the conclusion. HMRC has made clear that rubber-stamping all contractors as outside IR35, or issuing blanket inside-IR35 determinations without individual assessment, does not meet the reasonable care standard.

Practices advising end clients on their IR35 obligations should recommend a process that includes: individual assessment of each engagement against the status tests; a documented SDS for each contractor; a review trigger when contractual terms or working arrangements change; and a client-facing disputes process that allows contractors to challenge the determination.

Frequently Asked Questions

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.