If you own or manage a CA practice in the UK, your firm’s busiest season just got busier. You have a contractor handling overflow, and they are delivering fast turnaround times and solid work. It all sounds good. Then you get a letter from HMRC flagging IR35 compliance. Suddenly, your contractor is costing you time, money, and credibility.
That is the paradox. While most contractors bring efficiency and flexibility, they also carry compliance risks that most firm owners do not notice until the bill arrives.
We have worked with several UK practices over the past two decades. Partners love contractors during peak periods, but finance directors quietly worry about them afterward. Yet most firms treat IR35 like a checkbox. It is not. The rules are narrow, the penalties steep, and the gray area where most contractors sit is exactly where HMRC has been focusing its audit work.
IR35 Seems Simple Until It Doesn't
The IR35 legislation is deceptively simple. If you have someone working for you who is genuinely self-employed, they will manage their own tax. However, if they are an employee disguised as self-employed to save you money, as a practice owner, you should be deducting PAYE.
In such situations, reality does not neatly fit into those two boxes. A contractor working full-time at your firm, taking assignments from you and working your hours, the facts point one way, while the contract says something else. Under such circumstances, the HMRC looks at substance, not the label.
In 2024, the tax authority made it clear what “control” means: direction over how the work is done, not just what. If you are telling the contractor which client to assign to or how they should plan their day, you are exercising control. However, if you are their only practical source of work, substitution is not real.
While there are very technical points, these are also the basis for HMRC determinations that cost firms six figures in arrears, interest, and penalties.
For UK accountancy firms, the shift began in 2022. Back then, the off-payroll working rules primarily targeted IT contractors. However, HMRC expanded them, and suddenly the accountancy firms found themselves in scope. The temporary tax prep staff the accountancy firms had, the audit assistants, the outsourced bookkeeping support, etc., all now trigger IR35 assessments.
There has also been a significant increase in HMRC’s contractor audit activity. They are no longer looking at professional services, construction, and public sector contracts. The message is clear: they believe misclassification is widespread.
In the meantime, your firm is growing, tax seasons are busier, and hiring permanent staff takes time. Contractors fill the gap fast. Thirty days from contact to delivery. Compare that to a six-month hire cycle, and it is obvious why practices default to contracting.
That speed has a cost. Without proper documentation and assessment, you are flying blind.
The Documentation Gap
The documentation gap is where most firms go wrong. Most accountancy practices have a contractor agreement saying, “You are self-employed and responsible for your own tax.” Done. They pay an invoice. Two years later, HMRC shows up with questions.
- Did you direct the work?
- Could they substitute?
- Were they genuinely available for other clients?
And in most cases, firms do not have any of that information documented, or worse, the facts contradict the contract entirely.
In one case, we saw a managing partner keep a contractor on for 18 months in an audit team slot. Full-time. Paid through the firm’s project codes like a regular employee. Never once did the contractor take work elsewhere—no substitute clause in the agreement. HMRC disallowed the entire deduction. The firm owed arrears on the employer’s NI for that period, plus 8.75% interest, plus a penalty for failure to operate PAYE correctly.
The bill came to nearly £40,000 for twelve months of contractor work that had felt completely routine at the time.
You can prevent this. But you need a process.
What actually works?
As an accountancy firm, you need to treat IR35 assessments as compliance decisions, not administrative tasks.
Before you get a contractor on board, you need to ask hard questions.
- Will they work only for you?
- Can they realistically work for competitors?
- Who provides equipment?
- Do they invoice you directly, or through an umbrella company?
You need to document the responses, not in a casual email, but in a structured assessment that sits with their file. If a contract includes genuine substitution rights, you need to state them clearly. If control rests with you, acknowledge it.
Then classify accordingly. If your assessment shows IR35 likely catches them, you have two choices: restructure for genuine flexibility and real substitution rights, or move them to payroll. If the facts support self-employment, document thoroughly.
Moving to payroll costs more upfront. You pay the employer’s NI and process PAYE. However, you eliminate the audit risk and protect your firm’s standing with HMRC.
The unspoken cost
There’s a huge reputational angle to it as well. HMRC’s relationship with accountancy firms depends on your own compliance. You advise clients on their tax positions. You prepare their returns. You help them navigate the rules. If HMRC finds your contractor arrangements non-compliant, everything changes. They stop giving you the benefit of the doubt on client positions. They’re less collaborative when you query a notice.
That’s not written in the legislation, but if you have lived through an HMRC audit, you know it’s real.
The question to ask yourself
If you have a contractor on your team, ask your finance director one specific question: Can they provide a clear IR35 assessment for each contractor? Not a contract. Not an invoice. An actual assessment that documents control, substitution rights, and exclusivity.
If the answer is no, you have a huge documentation problem at minimum. Perhaps even a compliance problem.
However, if they can deliver and you have the facts to support the classification, there’s nothing to worry about. If they can, but the facts contradict it, you’ve found something that needs fixing before HMRC does.
This isn’t about being harsh with your contractors. It’s about knowing the legal position so you can structure the engagement honestly. That might mean moving them to payroll. It might mean redesigning the role so that substitution is genuine and control is actually shared.
Either way, it’s better than the alternative. And the good contractors will respect the professionalism. If you need help managing your contractor situations, write to us at marketing@datamaticsbpm.com, and our audit experts will reach out with a solution tailored to your business needs.
What happens if we get IR35 wrong?
HMRC disallows the contractor’s expenses; you owe arrears of the employer’s National Insurance for the period they worked, plus 8.75% interest and a penalty for operating PAYE incorrectly. One managing partner we know owed nearly £40,000 for 12 months’ work, and that was before reputational damage affected their standing with HMRC on client positions.
How much can we be fined?
Penalties typically range from 20% of the unpaid tax (for careless failure) to 70% (for deliberate failure). On top of that, you’re paying 8.75% interest on arrears from the date the tax should have been deducted, compounded annually. So a £40,000 arrears bill becomes significantly more once interest and penalties are applied, and HMRC backlogs can mean audits reach you 2–3 years after the engagement ended.
Which contractors are at risk?
Anyone you’ve classified as self-employed who is actually working full-time at your firm, taking assignments you direct, working your hours, or realistically unable to work for competitors. The risk is highest for audit assistants, tax prep staff, and bookkeeping outsource workers brought in seasonally or for long-term overflow. Part-time specialists who genuinely serve multiple clients are lower risk, but the facts matter more than the label.
Can outsourcing help with IR35?
Yes, but carefully. Outsourcing to a structured firm (not an individual contractor) shifts some compliance responsibility to them. But you still need to assess whether IR35 catches the arrangement itself. If you’re directing their work, controlling how they operate, or they’re your only practical source of supply for that role, the outsourcer’s own status doesn’t protect you. The best outsourcing partners have robust IR35 assessment processes and can demonstrate them by requesting documentation before engagement.
How do we communicate changes to contractors?
Be direct and professional. If you’re moving a contractor to payroll, frame it as a compliance decision, not a cost-cutting move. Explain: “We’ve completed an IR35 assessment and determined that your role needs to be treated as employment for tax purposes. Here’s how this benefits you [outline pension, benefits, statutory rights] and here’s what changes [deductions, payslip, holiday entitlement].” If you’re restructuring their role for genuine flexibility, be specific about new boundaries: substitute rights, client assignment freedom, equipment responsibility. Contractors respect honesty about legal positions; ambiguity creates distrust.
