Navigating HMRC IR35 inspections can feel daunting for UK limited company contractors, but understanding the process is essential for staying compliant and protecting your income. This guide explains what IR35 is, how inspections work, and what steps you can take to respond effectively.
Whether you’re managing your accounts yourself or working with an expert IR35 accountant, knowing the rules helps you plan your salary, dividends, and contracts with confidence. Read on to discover everything you need to know about HMRC IR35 inspections, from the initial contact to potential penalties, so you can approach any review fully prepared.
Table of Contents:
- What is IR35?
- What Causes IR35 Inspections for Businesses?
- The Inspection Process
- How to Prepare & Respond
- Penalties for Non-Compliance
- Why Choose Nexus Accounting for IR35 Inspection Advice?
What is IR35?
IR35 is a set of UK tax rules that determine whether a contractor operating through a limited company is genuinely outside of employment for tax purposes or should be treated as an employee. If a contract falls “inside IR35,” the contractor’s income is subject to PAYE tax and employee/employer National Insurance, just like a regular employee.
For limited company contractors, understanding IR35 is essential because it affects how you structure contracts and prepare for HMRC IR35 inspections while ensuring your salary and dividends remain tax-efficient. Working with a specialist IR35 accountant helps you stay compliant and reduces the risk of penalties.
What Causes IR35 Inspections for Businesses?
HMRC may decide to inspect a limited company contractor’s arrangements if certain risk factors or patterns suggest that a contract might fall inside IR35. Understanding these triggers can help contractors and their accountants prepare and reduce the likelihood of unexpected scrutiny. Common causes include:
- High-value or long-term contracts – Large payments or extended engagements can attract HMRC attention.
- Non-standard working practices – Limited control, lack of substitution rights, or unclear contract terms can raise questions.
- Previous non-compliance – Companies with past errors or discrepancies in filings may be more likely to be selected.
- Industry-specific trends – Certain sectors with high contractor usage, like IT or engineering, are more closely monitored.
The Inspection Process
HMRC IR35 inspections follow a formal process for reviewing limited company contractors’ compliance with IR35 rules. Understanding each stage can help you respond efficiently and minimise risk.
Initial Contact
HMRC begins the inspection by sending a formal letter, often titled “Check of employer records,” requesting specific documentation such as contracts, income breakdowns, invoices, and timesheets for the relevant tax year. This initial communication sets the tone for the inspection, so it’s important to respond promptly and start preparing the requested records immediately.
Response & Evidence Gathering
Once contacted, limited company contractors, often with the support of a specialist IR35 accountant, must submit evidence to demonstrate their IR35 status. This includes both the written contract and proof of actual working practices, such as project details, correspondence, and timesheets. Clear and organised evidence is crucial to show that the engagement is genuinely outside IR35 where applicable.
HMRC Review
An HMRC status inspector reviews the submitted evidence carefully, applying key employment tests: Control (who directs the work), Substitution (can the contractor send someone else), and Mutuality of Obligation (whether the company is obliged to provide work continuously). The inspector uses these tests to determine if the contract should be treated as inside or outside IR35, which affects tax and National Insurance obligations.
Client/Agency Involvement
If HMRC considers the initial evidence insufficient, they may contact your end client or agency to verify details. Having aligned and consistent evidence from the client side is essential. A specialist IR35 accountant can manage communications, ensuring all information supports your limited company’s position and reduces the risk of disputes.
Outcome & Appeal
After the review, HMRC issues a status determination. If the contract is deemed inside IR35, an assessment may be raised for unpaid tax, National Insurance contributions, and penalties. Limited company contractors have 30 days to appeal the decision or opt for Alternative Dispute Resolution (ADR). Working with an IR35 accountant during this stage can help evaluate options, lodge appeals, and plan next steps effectively.
How to Prepare & Respond
Proper preparation is key to handling an HMRC IR35 inspection smoothly. Limited company contractors who plan ahead can respond confidently, reduce risk, and ensure compliance.
Gathering Documentation
Before responding to HMRC, make sure you have all relevant records organised and readily available. Key documents include:
- Signed contracts and any amendments
- Timesheets or project logs showing actual working practices
- Invoices and payment records
- Correspondence with the client or agency
- Evidence of substitution rights and control over work
Keeping these documents accurate and organised helps support your IR35 status and speeds up the inspection process.
Engaging an IR35 Accountant
Working with a specialist IR35 accountant, like the team at Nexus Accounting, can make a significant difference. We can:
- Review your contracts and working practices for IR35 compliance
- Identify potential risk areas before HMRC questions arise
- Advise on how to structure responses and evidence
- Communicate with HMRC on your behalf if needed
Partnering with an expert ensures your limited company is fully prepared, reduces the chance of errors, and gives you confidence throughout the inspection.
Responding to HMRC Queries
When HMRC issues queries, respond promptly and clearly. Best practices include:
- Providing concise, well-organised evidence that directly addresses HMRC requests
- Avoiding unnecessary commentary that could create confusion
- Keeping a record of all correspondence for future reference
- Working closely with your IR35 accountant to ensure responses are accurate and compliant
Timely, accurate responses show HMRC that your limited company is compliant and can help minimise the risk of penalties or disputes.
Penalties for Non-Compliance
HMRC IR35 inspections can have serious consequences for limited company contractors, so it’s important to know what’s at stake and how to protect your company.
Unpaid Tax and National Insurance
If HMRC finds a contract falls inside IR35, your limited company could be asked to pay backdated income tax and National Insurance on salaries. This could cover several years, which can be a heavy financial hit and affect day-to-day business operations. Having a specialist IR35 accountant helps you understand what might be owed and ensures everything is handled correctly.
Interest on Late Payments
HMRC charges interest on any unpaid tax or National Insurance from the date it was due. This can quickly add to the overall cost. Keeping records in order and submitting payments on time reduces the chance of unexpected charges.
Fines and Penalties
Mistakes or non-compliance can lead to fines. The amount depends on whether HMRC considers it careless or deliberate. Getting professional advice early, and responding quickly if HMRC raises questions, often helps limit or avoid penalties.
Reputational Risk
Being flagged for IR35 issues can affect relationships with clients and agencies and may make HMRC more likely to check your company again in future years. Staying compliant protects not only your finances but also your credibility as a contractor.
Why Choose Nexus Accounting for IR35 Inspection Advice?
Navigating an HMRC IR35 inspection can be stressful, but you don’t have to do it alone. Nexus Accounting specialises in supporting limited company contractors across the UK, providing expert guidance and practical advice to stay compliant.
Reasons contractors trust Nexus:
- Specialist Knowledge for Contractors – We work exclusively with limited company contractors, so we understand the challenges around IR35, salary planning, and compliance.
- Personalised Support – You get a dedicated IR35 accountant who knows your business and provides tailored advice for contracts, evidence, and HMRC communications.
- Practical, Clear Advice – Complex IR35 rules are broken down into actionable steps, helping you avoid costly mistakes.
- Proactive Planning – We help you structure contracts, salary, and dividends to minimise IR35 risk before HMRC inspections occur.
- Accessible and Responsive – Our team is easy to reach by phone, email, or video call, making the IR35 process less stressful.
Key Takeaways for IR35 Inspections
- IR35 affects how limited company contractors are taxed, determining whether income should be treated as employment income or outside IR35.
- HMRC inspections are triggered by specific risk factors, such as contract length, payment structures, or inconsistencies in filings.
- The inspection process is structured and formal, with stages including evidence gathering, client involvement, and the potential for appeal.
- Accurate records and organised documentation make responding to HMRC faster and more effective.
- Working with a specialist IR35 accountant like Nexus Accounting helps contractors understand their position, prepare for inspections, and stay compliant.
- Penalties for non-compliance can be costly, including backdated tax, National Insurance, and interest, so proactive planning is essential.
- Staying compliant protects your income and reputation while giving you confidence to focus on your contracting work.
FAQs
What triggers a HMRC inspection?
An HMRC IR35 inspection is usually triggered when the tax office spots something unusual in your filings, contracts, or payment patterns. Common triggers include long-term contracts that resemble employment, taking most income as dividends, or inconsistencies between company accounts and self-assessment submissions. Limited company contractors can reduce the risk by keeping accurate records, maintaining clear contracts, and seeking advice from a specialist IR35 accountant.
Do HMRC investigate every tip off?
No, HMRC does not investigate every tip-off. While they receive many reports, investigations are typically launched only if the information is credible and supported by data from tax returns, payroll filings, or other sources. For limited company contractors, this means that staying compliant and transparent is often the best protection against unnecessary scrutiny.
How likely is an IR35 investigation?
The likelihood of an HMRC IR35 inspection depends on your industry, contract structure, and filing history. Sectors with a high number of contractors, such as IT and engineering, are more closely monitored. However, contractors who use professional accountants, keep up-to-date records, and follow IR35 regulations carefully are far less likely to be investigated.
What are the red flags for IR35?
Red flags for HMRC include contracts that show a high level of control by the client, lack of substitution rights, or ongoing obligations that resemble employment. If your contract looks or operates like a permanent job, it may be flagged for review. Working with Nexus Accounting can help ensure your contracts and working practices reflect genuine contractor status.
How do I know if HMRC are investigating me?
HMRC will always contact you formally if they open an investigation. The process usually begins with a letter titled “Check of employer records,” asking for contracts, invoices, or other documentation. If you receive this type of letter, it’s important to seek professional advice immediately. Firms like Nexus Accounting can help you review the request, gather evidence, and respond correctly to protect your limited company.
Stay Confident with IR35 Support from Nexus Accounting
Understanding IR35 and HMRC inspections is key to protecting your income and keeping your limited company compliant. With the right preparation, clear records, and expert guidance, you can face any inspection with confidence.
At Nexus Accounting, we specialise in helping limited company contractors manage IR35, taxes, and HMRC reviews with ease. Whether you need help reviewing contracts, responding to HMRC, or planning your salary and dividends, our team is here to support you every step of the way.
If you’d like tailored advice or support with an HMRC IR35 inspection, get in touch with Nexus Accounting today. We’ll make sure your company is compliant, efficient, and ready for whatever comes next.
