IR35 Investigations Set to Rise: How to Stay Ahead
HMRC is ramping up IR35 enforcement in a big way. The tax authority has grown its specialist IR35 compliance team and is sending more "friendly" compliance check letters that can quickly turn into full investigations.
For STEM organisations relying on a contingent workforce, it's a direct threat to your bottom line and business operations.
The Real Risk for Engineering Companies
You're More Vulnerable Than You Think
Any time you engage contractors for specialist skills, project work, or temporary cover, you're potentially in HMRC's crosshairs.
Common high-risk scenarios include:
- Bringing in specialist engineers for specific projects
- Using contractors for peak workload periods
- Engaging technical experts not available in your permanent workforce
- Short-term operational cover arrangements
The Compliance Burden Is Real
Since April 2021, you're responsible for determining whether contractors are employees for tax purposes. You must issue Status Determination Statements (SDS) and get it right, or face potential liability.
Here's the reality: Surveys show that over 50% of contractors say their clients haven't even provided them with an SDS. This widespread non-compliance is exactly what HMRC is targeting.
What HMRC Investigations Look Like
How They Start
HMRC's investigations often begin with innocent-looking letters described as "contingent workforce audits" or "simple questionnaires." Don't be fooled, inadequate responses can trigger full-scale investigations.
The tax authority uses sophisticated risk profiling to target specific sectors and companies. No industry is off-limits.
What Triggers an Investigation
- Anonymous tips from contractors or employees
- Unusual patterns in your tax filings
- Industry-wide compliance campaigns
- Data mismatches across different submissions
- Being part of a high-risk sector review
The Financial Reality
Direct Costs
If HMRC finds you've misclassified a worker, you're potentially liable for:
- 100% of unpaid taxes and National Insurance
- Additional penalties for careless errors
- Interest on unpaid amounts
For a contractor earning £500 per day, you could be facing £20,000+ in unpaid taxes and National Insurance and penalties.
Hidden Costs
Beyond the immediate financial hit, non-compliance can:
- Damage your reputation (HMRC can publicly name non-compliant companies)
- Make contractors reluctant to work with you
- Breach existing contractual obligations
Getting Compliance Right
The Basics You Need
Defined Assessment Process Each contractor relationship needs individual assessment. You can't make blanket decisions, every engagement must be evaluated based on the actual working arrangements.
Documentation That Matters Keep detailed records of how you reached each IR35 decision. If HMRC comes knocking, you need to show your working.
Status Determination Statements You must issue these to contractors and any intermediaries. No excuses, it's a legal requirement.
Common Mistakes to Avoid
- Using the HMRC CEST tool without understanding its limitations
- Making decisions based on contracts alone (working practices matter more)
- Failing to reassess when working arrangements change
- Not having proper appeals processes in place
Practical Steps to Protect Your Business
Immediate Actions
- Audit your current contractor relationships - Identify who might be affected by IR35
- Review your assessment processes - Are you making proper determinations?
- Check your documentation - Do you have proper SDS records?
- Train your team - Ensure hiring managers understand IR35 requirements
Longer-term Strategy
Invest in Proper Systems
You need systems that can handle assessments, documentation, and appeals efficiently.
Get Expert Support
IR35 is complex, and the rules keep evolving. Don't try to navigate this alone, the cost of getting it wrong is high.
The Market Reality
The IR35 landscape is changing fast. Two in five contractors have seen demand decline since the Autumn Budget, and 67% feel less confident about securing outside IR35 roles.
How Owen Daniels Can Help
We know the challenges facing engineering and manufacturing companies in the IR35 landscape. Our services are designed to take the complexity out of compliance:
Expert IR35 Support - Get specialist guidance tailored to your industry and specific situations.
Practical Training - We train your staff and hiring managers so they can make confident, compliant decisions.
Smart Determination Tool - Our technology covers statutory obligations while creating the audit trail you need for HMRC compliance.
Borderline Case Advice - When contractor relationships fall into grey areas, our experts provide the clarity you need.
The Bottom Line
HMRC's enforcement is intensifying, and IR35 investigations are set to rise. For engineering and manufacturing companies, it's a present danger that requires immediate action.
The companies that will thrive are those that embed proper IR35 compliance into their operations now. Don't wait for an investigation to discover your vulnerabilities.
Take control of your IR35 compliance today, before it takes control of your business.
