Case Studies

Top Compliance Risks for UK-Taxed Contractors Under IR35 and How to Mitigate Them

Contractors inside IR35 face new liabilities and traps: here are the key risks and practical strategies to protect your earnings and tax status.

By NomadicTax Research Team • 5-8 min read • August 22, 2026

## IR35 Oversight: What’s Changed & Why IR35 Still Matters IR35 (off-payroll working rules) aim to ensure that individuals who are **effectively employees** but supply services via intermediaries (companies, partnerships, etc.) pay similar tax and National Insurance as employees. Contractors deemed inside IR35 face PAYE and NIC responsibilities usually borne by employer. ## Key Compliance Risks for Contractors - **Misclassification of working status**: Things like control, substitution right, mutuality of obligation still cause disputes when HMRC audits. - **Double taxation issues**: E.g., when workers and intermediaries have already paid some tax but deemed employer liabilities are assessed. There has been recognition from Parliament and interest in reform, though change is not yet enacted. ([assets.publishing.service.gov.uk](https://assets.publishing.service.gov.uk/media/6568b6f82ee693001360cbb5/E03022635_CP_987_Treasury_Minutes_Progress_Report_Accessible.pdf?utm_source=openai))- - **Non-deed or missing contracts**: Without formal contracts that reflect real working practices, assessments are vulnerable. - **Umbrella company traps**: Hidden fees, lack of clarity over who does what, unexpected PAYE/NIC deductions. ## Mitigation Strategies: Protect Yourself - **Perform a status check**: Use **HMRC’s ‘Check Employment Status for Tax’ (CEST)** tool, but also take legal advice where necessary. Document the working relationship: who controls what, substitution, etc. - **Maintain proper contracts**: Reflect actual working practices (who provides tools, whether substitution is allowed, notice periods etc.). - **Monitor your tax position year-round**: Set aside funds for potential PAYE/NIC if inside IR35; ensure tax is correctly calculated in your self assessment if required. - **Consider incorporation or unincorporated status**: Sometimes trading through a company (when outside IR35) can offer tax planning opportunities; beware of company costs and personal risk. ## Example Case: Contractor Inside IR35 Tom works via his personal service company for a client. The contract allows no substitution, client sets hours, and Tom uses client’s equipment. HMRC audits and determines he’s inside IR35 from **6 April 2024**. His deemed employer liability arises. Tom must pay PAYE/NIC, but may seek relief where tax/NIC already paid. Parliament has discussed reform to allow set-offs, but no confirmed law change yet. ([assets.publishing.service.gov.uk](https://assets.publishing.service.gov.uk/media/6568b6f82ee693001360cbb5/E03022635_CP_987_Treasury_Minutes_Progress_Report_Accessible.pdf?utm_source=openai)) ## Actionable Remedies If You Might Be Inside IR35 - Ensure all contracts are reviewed for employment status risks. - Request written review or determination from clients where possible. - Keep records of actual working practices (emails, correspondence, invoices etc.). - Engage a tax professional if client insists you are inside IR35 to understand financial implications.