IR35 has become one of the most closely monitored areas of UK tax compliance, and HMRC is increasingly active in reviewing contractors, agencies, and end clients. Whether you’re a business engaging off-payroll workers or a contractor operating through a limited company, IR35 checks can feel stressful, detailed, and time-consuming. The real concern, however, is the potential for penalties if HMRC decides you have not followed the legislation correctly. These penalties can include unpaid tax, interest, and additional charges for careless or deliberate mistakes.

Understand What HMRC Looks for During IR35 Checks

To reduce the risk of penalties, it is important to know what triggers scrutiny. HMRC conducts IR35 checks to determine whether a contractor is genuinely self-employed or should be taxed like an employee. They typically review three core areas: the written contract, the actual working practices, and historical engagement patterns. HMRC focuses heavily on issues such as control, substitution, and mutuality of obligation, and will cross-check whether the practical working relationship matches what is written in the contract.

If the evidence is inconsistent or incomplete, HMRC becomes more likely to impose penalties. This is why businesses and contractors need to fully understand the rules and ensure every engagement reflects IR35 requirements from the start.

Review Contracts Thoroughly Before Work Begins

One of the most effective ways to reduce penalties is to ensure contracts are accurate, clear, and aligned with IR35 rules. Many engagements fail IR35 checks simply because the contract suggests employment-like conditions. Contracts should avoid employee-style language such as job titles, fixed hours, and supervision requirements. The agreement should focus on services delivered rather than personal duties.

A strong IR35-safe contract also includes details about substitution, project-based work, independence, and overall responsibilities. Having a contract professionally reviewed can significantly reduce the risk of penalties during an HMRC review. Businesses often choose to work with specialist payroll and compliance providers such as The Infinity Group because they provide contract support and structure engagements in line with HMRC guidance.

Ensure Working Practices Match the Contract

Even the best contract will not protect you if the working practices contradict what is written. HMRC places more weight on the reality of the working relationship than on the paperwork. If a contractor is expected to work fixed hours, follow day-to-day instructions, or report to a manager for supervision, HMRC may argue the role is inside IR35 even if the contract suggests otherwise.

To reduce the risk of penalties, businesses must ensure that contractors maintain autonomy, are engaged for specific outcomes, and are not treated like employees. Contractors should avoid being included in staff rotas, employee meetings, or internal benefit schemes. Consistency between contract and practice shows HMRC that you have made reasonable efforts to comply with IR35, which can reduce or prevent penalties even if a mistake is later identified.

Keep Clear and Detailed Records

HMRC penalties often result from lack of documentation. Businesses and contractors should keep records of engagement terms, communication about substitution, project milestones, timescales, and responsibilities. For contractors, keeping evidence of business activity such as marketing, insurance, accounting records, and invoices helps demonstrate genuine self-employment.

Accurate records show HMRC that you took reasonable steps to get IR35 right, and this alone can reduce penalties. Companies using contractors at scale often rely on payroll partners like The Infinity Group because they maintain compliance records and streamline documentation, reducing the chance of errors.

Use HMRC’s CEST Tool Carefully and Keep the Results

The Check Employment Status for Tax (CEST) tool allows businesses and contractors to assess employment status. While not perfect, HMRC accepts CEST results if the information provided is accurate. When using the tool, it is essential to answer every question honestly and consistently with the contract and working practices. Print or save every result, including the reasoning behind the answers.

During an IR35 check, providing a CEST outcome that supports your determination can significantly reduce penalties by proving that you took a structured approach to compliance.

Avoid Long-Term, Open-Ended Engagements Without Review

Another factor that increases IR35 compliance risk is long-term contractor engagements that start looking like permanent employment. HMRC may interpret multi-year contracts with no clear project milestones as indicators of disguised employment. To reduce penalties, businesses should review contractor arrangements regularly and update contracts when responsibilities or working practices change.

Regular reviews demonstrate active compliance management, making it harder for HMRC to argue that mistakes were careless or deliberate. Many UK businesses use solutions from The Infinity Group to reassess contractor arrangements throughout the year, especially when projects evolve.

Train Your Internal Teams on IR35 Responsibilities

A large number of penalties come from businesses misunderstanding what IR35 requires. Recruitment teams, project managers, and HR departments should understand how IR35 rules apply to contractors. They should avoid giving employee-style instructions, allocating fixed schedules, or involving contractors in activities that suggest employment.

Clear internal processes reduce the risk of HMRC penalties because the business can show it has established compliance controls. Training also ensures that decisions made during projects don’t accidentally place contractors inside IR35.

Work with Specialist Payroll and Compliance Providers

Managing IR35 correctly requires ongoing monitoring, documentation, and correct assessments. Many UK businesses choose to work with umbrella, CIS, and payroll specialists who understand the legislation thoroughly. The Infinity Group supports organisations by providing accurate payroll management, IR35 guidance, contract reviews, and compliance checks. This level of support not only reduces administrative stress but also significantly lowers the risk of penalties during HMRC reviews.

Using a specialist provider shows HMRC that you took reasonable care, which often results in reduced penalties even if a determination is challenged.

Take Early Action if HMRC Contacts You

If HMRC starts an IR35 review, responding quickly and accurately can prevent the situation from escalating. Provide requested documents, review all engagement details, and ensure consistency across all information. Delays or unclear responses can lead to more probing questions and potentially larger penalties. It is always helpful to get professional advice early in the process to avoid mistakes that HMRC might interpret as careless.

Conclusion

Reducing the risk of penalties during IR35 checks requires careful planning, accurate documentation, and consistent working practices. Whether you are a contractor or a business engaging contractors, understanding the rules and applying them correctly can save significant time, stress, and financial loss. From contract reviews to internal training, regular audits, and using tools like CEST, every step taken toward compliance helps protect you from HMRC penalties. Many organisations choose to partner with experienced providers such as The Infinity Group to strengthen their compliance and ensure their contractor management processes remain aligned with UK regulations. With the right approach, IR35 checks do not need to be daunting and can be managed confidently and professionally.