Compliance
Staying Compliant: What UK Freelancers Should Know About IR35 & HMRC’s Powers
HMRC’s Schedule 36 reforms and new criminal and civil penalties are changing compliance risk—freelancers need to update contracts, record keeping, and risk assessment.
By NomadicTax Research Team • 5-8 min read • August 19, 2026
## Overview of Compliance Risks in 2026
Freelancers and contractors in the UK must pay close attention to enforcement changes coming through consultations in the **Tax Update 2026** package, especially regarding HMRC’s information powers and new penalties.([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
Key measures under review include:
- Reforms to **Schedule 36 of Finance Act 2008**, which defines HMRC’s powers to inspect records and obtain information. The consultation aims to modernise definitions (including computer records), ensuring HMRC has access to digital materials.([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
- A proposed **criminal offence** for making **reckless untrue declarations** or false statements in direct tax. This marks a significant escalation from civil penalties.([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
## Implications for IR35 and Contractors
### Contract assessments and record creation
Under the IR35 rules, whether someone is inside or outside involves evaluating:
- Whether substitution is allowed
- Who controls how, when and where work is done
- Whether there is mutuality of obligation
As HMRC increases power over inspection and record access, freelancers must maintain clear, contemporaneous evidence — written agreements, invoices, timesheets — to support their status.
### Consequence of mis-classification
- Being inside IR35 means you must pay **both income tax and employee’s National Insurance** on payments, reducing net take home substantially.
- If HMRC pursues cases involving reckless false statements, the financial and reputational costs may be severe. Civil penalties are already substantial; criminal penalties escalate risk significantly.
## Actionable Steps for Compliance
- **Review all contracts**: Ensure they clearly delineate contractor status (substitution, control, mutuality) with written agreements.
- **Maintain strong records**: Timesheets, emails, invoices, communications. Digital records are especially important.
- **Seek expert advice**: For complex arrangements, consider obtaining opinions or assurance from employment law lawyers or tax professionals.
- **Monitor legislation and consultations**: The consultations on HMRC’s powers are still open. Feedback and stakeholder views may alter final form.([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
## Example Scenario
**David**, a freelance software developer, has been working under contracts labeled “outside IR35”. He has no right of substitution and is told when and where to work, from 9-5. He’s currently using older email chains and verbal commitments to defend status. With new inspection powers, HMRC could demand full digital records; David should formalise substitution clauses, align control terms, and store records systematically (e.g. digital folders, encrypted backups).
## Tips to Mitigate Risk
- Use **Day-rate or Project-rate contracts** with explicit substitution rights.
- Limit reporting ambiguity: document your actual working practice matches what’s in the contract.
- Cross-reference your status with HMRC’s CEST (Check Employment Status for Tax) tool — though not definitive, helps assess risk.
- Regularly review accounts and seek pre-emptive rulings where available.
## Conclusion
Changes to HMRC’s compliance powers and new criminal penalties mean **higher stakes for contractors under IR35**. By tightening contracts, preserving all records, and staying current with policy changes, freelancers can reduce risk and ensure they’re treating IR35 status honestly and defensibly.