How to stay compliant with IR35 when hiring contractors

Whether you're bringing in a specialist for a short project or using contractors as part of your ongoing operations, it's essential to assess your obligations and ensure you're not inadvertently creating an employment relationship in the eyes of HMRC.

Employment status issues often arise in sectors that rely heavily on consultants for specialist input or short-term projects — including technology, construction, media and financial services.

At the same time, the nature of work is changing. More people are choosing to work as contractors or consultants, attracted by the flexibility, variety, and earning potential. Businesses also turn to consultants to access specialist skills and quickly adapt in fast-moving industries.

If you're reviewing how you engage contractors or need legal support with consultancy agreements, contact our solicitors.

What is IR35, and who does it apply to

IR35 rules are designed to prevent tax avoidance through 'disguised employment'. They apply where a contractor works through a limited company but would otherwise be considered an employee if that company didn't exist.

Since April 2021, private sector clients — including most medium and large businesses — have been responsible for determining a contractor's employment status and applying the correct tax treatment. Small businesses are currently exempt from this responsibility.

If your business falls within scope, you must assess the contractor's IR35 status and apply PAYE if they are deemed to be an employee. While the tax consequences sit with HMRC, it is important to get the legal framework and contractual documentation around employment status right.

How to determine employment status

IR35 status depends on the reality of the working arrangement. HMRC will look at factors such as:

• Control: Does the business control how, when or where the work is done?
   
• Substitution: Can the contractor send someone else to do the work?
   
• Mutuality of obligation: Is the business obliged to offer work, and is the contractor obliged to accept it?
   
• Integration: Is the contractor treated like an employee, attending staff meetings, managing team members, and using internal systems?
   
• Financial risk: Does the contractor bear personal risk or stand to profit from efficient delivery?

The overall picture matters more than any one clause, and contracts must reflect what's happening in practice.

Steps to stay compliant with IR35 rules

If your business hires contractors, you must take a clear and consistent approach to assessing and documenting employment status. This includes:

• Carrying out a status assessment before the engagement starts.
   
• Providing a written Status Determination Statement (SDS) if you're the end client.
   
• Reviewing your contracts to ensure they reflect the intended working relationship.
   
• Keeping records of assessments and correspondence.
   
• Reassessing status if the nature of the work or working relationship changes.

We help businesses ensure their contractor arrangements are legally robust, particularly regarding consultancy agreements and employment status risk.

Common pitfalls

We regularly advise businesses who've run into issues by:

• Using off-the-shelf consultancy agreements that don't reflect the reality of the working relationship.
   
• Allowing contractors to become embedded in teams over time.
   
• Assuming that working through a limited company automatically avoids risk.
   
• Failing to document employment status or contract terms properly.
   
• Taking an inconsistent approach across similar contractor roles.

Support with contracts and IR35-related legal risk

Our solicitors work with employers to draft clear, practical consultancy agreements, assess employment status risk, and help reduce exposure to IR35-related disputes.

Contact our employment solicitors if you're reviewing your contractor arrangements and need support with the legal framework. We can work alongside your accountant, tax adviser or in-house finance team to ensure your legal arrangements support a compliant and consistent approach.

We support employers across the UK from our offices in London, Brighton, East Sussex and beyond.

Please note that this article is only intended as general guidance and cannot be relied upon as specific legal advice.