Eight years have passed since the off-payroll IR35 reforms reshaped the public sector, and it’s now been four years since they were rolled out to the private sector. The transition caused significant disruption across supply chains, with many firms reacting with caution or overcorrection. But now that the dust has settled, what have we learned, and what should firms be doing?

HMRC’s Shift in Focus

The days of HMRC targeting individuals in the media under the original IR35 legislation are behind us. The legacy investigations have concluded, with many not reaching a tax tribunal, as either HMRC dropped the case or taxpayers opted to settle. The tax authority’s focus has now decisively shifted.

The way HMRC conducts compliance checks for firms under off-payroll is not the same as it has been in the past two decades, when it has primarily chased individuals under the intermediaries legislation. Not only has the case law evolved, but HMRC’s approach has also changed.

HMRC now conducts off-payroll compliance checks through a risk-based lens, first identifying whether a firm’s systems and processes present a “low risk” of misclassification before considering whether to conduct a deeper dive. In practice, if HMRC is satisfied that a firm’s compliance approach is low risk, the check typically concludes within a year. But, if red flags are present, the inquiry can become considerably more protracted and costly to deal with.

The new HMRC way of running compliance checks underscores a vital point: pre-emptive compliance is not optional—it’s essential. Firms that can demonstrate a robust and well-documented compliance process are far less likely to face drawn-out investigations.

Tax Liabilities and What’s Coming

At present, no private sector firm has received a formal tax determination under the off-payroll rules. That’s no surprise, given HMRC’s standard four-year look-back window. However, we expect the first wave of tax bills for purportedly misclassified workers to begin arriving around January or February 2026.

Given the usual pace of tax tribunals, it’s unlikely we’ll see a tribunal case heard and decided before 2028. Also, bear in mind that only a small number of cases will make it that far, and it’s improbable that any will reach the Supreme Court before 2035. The timeline offers firms a decade of case-law stability, reliant on the principles confirmed by the Supreme Court in 2024, without fear of contradiction from newer case law.

The Tax Offset Mechanism: A Game-Changer

A long-overdue fix came into effect in April 2024, finally addressing one of the most pressing concerns for businesses: the disproportionate tax risk associated with getting IR35 status wrong. Previously, firms could face paying the full PAYE tax bill, even if the contractor had already paid income tax and corporation tax via their limited company.

Now, with the introduction of retrospective offset provisions, any tax already paid by the contractor is taken into account if HMRC determines the engagement should have been classified as “Inside IR35.” The fair update in the legislation reduces the financial exposure of businesses to approximately 15% of what was paid to the contractor, taking into account corporation and dividend taxes paid by the individual.

The update has led some firms to reconsider previously cautious stances, such as blanket bans on contractors, due to the previously disproportionate threat, which was four times the offset-based position. With fairness restored, the contractor model is very viable when underpinned by proper compliance.

Better Tools, Better Processes

Many firms have moved away from HMRC’s Check Employment Status for Tax (CEST) tool, which has not been updated since 2019. A recent FOI indicated that CEST usage had dropped 50% in the last tax year alone. Businesses are gravitating towards independent and more reliable status assessment solutions.

Savvy firms are also hot on leaving “footprints in the snow” – keeping comprehensive documentation. Contracts are well-drafted, status determinations are backed by written evidence, internal staff are trained, and compliance is baked into daily operations. With HMRC able to go back four years and modern-day staff turnover being limited to a few years, solid paper trails are essential to help protect the business.

Agencies Back Off as Clients Step Up

Recruitment agencies are shifting towards models that offer clients administrative support with status determinations without becoming their tax advisors. Instead, firms are taking full ownership of their own status determinations, as the legislation intended to do.

Where engagements are not “Outside IR35”, firms are taking a pragmatic approach. Rather than paying a PSC net of tax, which carries the risk of future claims, firms and agencies are sensibly insisting on PAYE-based payroll. The strategy for “not Outside IR35” simplifies compliance and streamlines HMRC audits. When an agency is asked whether deductions were made correctly, the response is simple: “All non-Outside IR35 workers are paid via payroll.” Case closed.

The Five Simple Principles

Years of experience have led to the emergence of a clear, practical best practice framework that firms should follow. These five principles are now widely adopted across industry and offer a blueprint for risk-free compliance:

1. Clients carry out their own IR35 status determinations.
2. The status decision is made before the engagement starts.
3. If the role is Inside IR35, the worker is paid through a payroll solution.
4. If the role is Outside IR35, the contractor’s company is paid gross.
5. All relevant staff are trained and follow a documented compliance process.

When followed correctly, these steps remove ambiguity, reduce tax risk, and ensure that firms can continue working with flexible, skilled contractors who are confident in their compliance.

In summary, as the landscape has matured, the scare stories have faded away, and with the right processes and understanding, firms have little to fear from IR35.