IR35 legislation has reshaped the UK contracting landscape, placing greater responsibility on both contractors and end clients to ensure correct tax treatment. An IR35 check is central to this process, determining whether a contractor should be treated as genuinely self-employed or as an employee for tax purposes. The outcome of an IR35 check has wide-ranging implications, influencing tax liabilities, working arrangements, costs, and compliance responsibilities. Understanding how an IR35 check affects both contractors and end clients is essential for operating confidently and compliantly in the UK market.

Understanding What an IR35 Check Is

An IR35 check is an assessment of a contractor’s employment status for tax purposes. It examines the nature of the working relationship between the contractor and the end client, rather than just the contractual paperwork. The aim is to establish whether the contractor is operating independently or working in a way that resembles employment.

Key factors considered during an IR35 check include control over how work is performed, the right of substitution, and mutuality of obligation. These factors help determine whether the engagement falls inside IR35 or outside IR35.

Why IR35 Checks Matter in the UK

IR35 checks matter because the tax consequences are significant. If a role is found to be inside IR35, the contractor’s income is taxed similarly to an employee’s, with income tax and National Insurance deducted at source. If the role is outside IR35, the contractor can usually continue operating through a limited company with different tax treatment.

HMRC has increased its focus on IR35 compliance, making accurate checks essential. Incorrect determinations can lead to backdated tax bills, penalties, and interest, affecting both contractors and end clients.

Impact of an IR35 Check on Contractors

For contractors, the outcome of an IR35 check directly affects take-home pay, working structure, and administrative responsibilities. An inside IR35 determination often results in higher tax deductions compared to working outside IR35 through a limited company.

Contractors inside IR35 may choose to work through PAYE or an umbrella payroll company. While this reduces tax efficiency, it also removes the risk of IR35 non-compliance and simplifies tax obligations.

An outside IR35 determination allows contractors to continue operating through their limited company, offering greater flexibility and potential tax efficiency. However, this also places responsibility on contractors to ensure their working practices continue to align with the determination.

Financial Implications for Contractors

One of the most noticeable effects of an IR35 check for contractors is the financial impact. Inside IR35 roles typically result in lower net income due to PAYE taxation and National Insurance contributions.

This can influence whether contractors accept certain roles, negotiate higher rates, or reconsider their working model. Some contractors prefer the certainty of umbrella payroll despite reduced take-home pay, as it removes long-term tax risk.

The Infinity Group supports contractors by helping them understand the financial implications of IR35 determinations and choose compliant working solutions that suit their circumstances.

Impact on Contractor Flexibility and Career Choices

IR35 checks also affect contractor flexibility. Some contractors may limit the types of roles they accept, focusing only on outside IR35 contracts. Others may diversify their approach, mixing umbrella payroll work with limited company engagements.

In some cases, contractors may decide that permanent employment offers greater stability, particularly if most available roles are inside IR35. As a result, IR35 checks can influence long-term career planning and market dynamics.

Impact of an IR35 Check on End Clients

For end clients, IR35 checks introduce new responsibilities and risks. Medium and large end clients in the private sector are responsible for carrying out IR35 checks and issuing a Status Determination Statement.

This shifts compliance responsibility away from contractors and places it firmly on end clients. Failure to carry out accurate IR35 checks can result in financial liability, penalties, and reputational damage.

Operational and Administrative Impact on End Clients

IR35 checks add administrative complexity for end clients. They must assess roles, document decisions, communicate determinations, and handle disputes. This requires time, resources, and an understanding of IR35 legislation.

End clients must also ensure that working practices align with the determination made. If actual working arrangements differ from the assessment, the organisation may be exposed to compliance risk.

Professional support from specialists such as The Infinity Group can help end clients manage these responsibilities more effectively.

Financial Impact on End Clients

Inside IR35 determinations can increase costs for end clients. Employer National Insurance contributions and the Apprenticeship Levy may apply, increasing the overall cost of engaging contractors.

These additional costs can influence hiring decisions, budgets, and project planning. Some end clients adjust contractor rates or shift towards alternative resourcing models to manage financial impact.

Risk Management and HMRC Scrutiny

IR35 checks play a key role in risk management for end clients. HMRC expects organisations to demonstrate reasonable care when making determinations. Poorly conducted or blanket IR35 decisions can attract scrutiny.

HMRC may investigate end clients that fail to carry out accurate IR35 checks, leading to audits and potential financial penalties. Maintaining clear documentation and evidence is essential for defending decisions.

Effect on Contractor and Client Relationships

IR35 checks can affect the relationship between contractors and end clients. Disagreements over determinations can lead to disputes, reduced trust, and even loss of talent.

Clear communication and transparency help mitigate these issues. Involving contractors in discussions about working practices and providing clear explanations for decisions can improve acceptance and cooperation.

The Role of Status Determination Statements

A Status Determination Statement is a formal document outlining the IR35 decision and the reasons behind it. This statement must be shared with contractors and agencies.

For contractors, the statement provides clarity on tax status and working arrangements. For end clients, it demonstrates compliance and reasonable care. Poorly written or vague statements can increase the risk of challenges and HMRC attention.

Dispute and Appeal Processes

Contractors have the right to challenge an IR35 determination. End clients must have a process in place to handle disputes and respond within the required timeframe.

A well-managed appeal process protects both parties and supports compliance. Ignoring challenges or failing to respond properly can escalate issues and increase legal risk.

Long-Term Market Impact of IR35 Checks

IR35 checks have reshaped the UK contracting market. Some end clients have reduced contractor use, while others have adapted by improving compliance processes.

Contractors have become more selective, and umbrella payroll usage has increased. Over time, IR35 checks continue to influence how projects are resourced and how flexible work is structured in the UK.

How Professional Support Helps Both Parties

Given the complexity of IR35 legislation, professional support is increasingly valuable. Advisors can help contractors understand their options and help end clients carry out accurate assessments.

The Infinity Group provides guidance to both contractors and businesses, supporting IR35 checks, compliance processes, and suitable payroll solutions. This reduces risk and helps maintain productive working relationships.

Balancing Compliance and Commercial Needs

Both contractors and end clients must balance compliance with commercial realities. Contractors want fair pay and flexibility, while end clients want access to skilled talent without excessive risk.

Accurate IR35 checks help strike this balance. When done correctly, they provide clarity, reduce uncertainty, and support sustainable working arrangements.

Conclusion

An IR35 check has a significant impact on both contractors and end clients in the UK. For contractors, it affects tax treatment, income, and career decisions. For end clients, it introduces compliance responsibilities, financial considerations, and operational challenges.

Understanding these impacts is essential for navigating the modern contracting environment. Accurate IR35 checks, clear communication, and proper documentation help reduce risk and support positive outcomes for all parties.

By working with experienced specialists such as The Infinity Group, contractors and end clients can approach IR35 checks with confidence, ensuring compliance with HMRC regulations while maintaining effective and flexible working relationships.