HMRC Compliance Checks Are Rising - Is Your Contractor Data Ready?

HMRC off-payroll compliance activity has increased steadily since the 2021 private sector reforms shifted responsibility for IR35 status determinations onto the end client. HMRC has collected an additional £4.2bn in tax revenues as a direct result of the off-payroll reforms between October 2019 and March 2023 – a figure that gives a clear indication of how seriously the activity is being enforced.

Most organisations assume a compliance check is unlikely to land on their desk. The reality is that nobody knows HMRC’s risk assessment criteria for selecting which businesses receive enquiries, which means no business operating with contractors is entirely off the radar. The ones most exposed are typically those who haven’t reviewed their contractor arrangements since the original 2021 changes came into force.

1. High contractor headcount

Organisations engaging a large number of contractors relative to their permanent headcount attract more attention, simply because the financial exposure of getting status determinations wrong is larger at scale.

2. High contractor tenure

A contractor engaged on a rolling basis for an extended period starts to resemble employment in practice, regardless of the contractual label. Tenure is one of the clearest signals HMRC looks for when assessing whether a determination reflects how the role actually operates.

3. Inconsistent inside/outside IR35 patterns

Where similar roles are determined differently with no clear rationale - one contractor inside IR35, another outside in a near-identical position - it signals that determinations may not be based on a consistent, defensible process.

What does HMRC ask for when it opens a compliance check?

When HMRC opens a check, it typically requests the Status Determination Statement (SDS) for each contractor in scope, the reasoning behind each determination, evidence of how the working arrangement operates in practice, and details of any right of substitution. It will also expect a clear audit trail showing who made the determination, when, and on what basis.

The actual language used in HMRC’s off-payroll working compliance check letters instructs end clients to “provide details of your outsourced services that you believe are fully contracted out and therefore exempt from client responsibilities under the off-payroll working rules” and to “provide details of the process you use to determine that a service is fully contracted out.” Knowing what HMRC is asking for in advance means businesses can prepare the right documentation before a check arrives, rather than scrambling to produce it under pressure.

What documentation gaps does HMRC find most often?

In practice, three gaps come up repeatedly when organisations are asked to produce this documentation:

• Missing or incomplete SDS records, particularly for contractors engaged before a formal process was introduced
• No clear audit trail connecting a determination to the reasoning and evidence behind it
• No documented right of substitution, even where one exists informally in practice

Any one of these gaps is difficult to resolve retrospectively once a check is already underway. They’re straightforward to close in advance.

What does a defensible contractor engagement actually look like?

A defensible position means every contractor has a current, reasoned SDS; the determination is supported by evidence of how the role operates day to day, not just the contract wording; and the audit trail showing how and when that determination was made is retained and accessible. Most organisations have parts of this in place. Few have all of it, consistently, across their full contractor population.

It’s also worth noting that even where documentation is in order, HMRC can still open a check and dispute a determination. For businesses with outside IR35 determinations, having insurance in place that covers defence costs and any resulting tax liability adds a further layer of protection beyond the documentation itself.

FAQs

What is a Status Determination Statement?

A Status Determination Statement (SDS) is the document an end client must provide to a contractor and the agency in the labour supply chain, setting out whether a role is determined inside or outside IR35, and the reasoning behind that decision.

Who is responsible for IR35 status determinations?

Since the 2021 private sector reforms, the end client engaging the contractor is responsible for determining IR35 status, rather than the contractor’s own personal service company. Owen Daniels supports clients through this determination process as part of its payroll and compliance services.

How far back can HMRC check contractor compliance?

HMRC can typically open compliance checks covering the current and prior tax years, and in cases involving suspected deliberate non-compliance, further back still. This is one reason a consistent audit trail matters even for arrangements set up some time ago.

What should a business do first if it hasn’t reviewed contractor compliance recently?

The most practical starting point is an audit of the current contractor population against the documentation HMRC would expect to see: SDS records, audit trails, and evidence of working practice. Owen Daniels offers audit services that review both direct and agency-engaged contractors for exactly this purpose. We also work alongside Kingsbridge – a specialist IR35 compliance and insurance partner – for businesses looking to ensure outside IR35 determinations are properly protected. Find out more at kingsbridge.co.uk.