IR35 business guide: compliance, risks and best practices 2026

What's included in this guide?

• Why IR35 compliance matters in engineering and energy
• IR35 fundamentals
• Determining status and proving “reasonable care”
• Business impacts - financial, operational, and reputational
• Key learnings
• Modern considerations - AI, cross border, and supply chain
• Actionable recommendations - dos and don’ts
• “Inside IR35 - now what?” Contractor options
• Culture, values, and reasonable care
• Quick reference: HMRC tools and NRL resources
• Conclusion and next steps

 

Why IR35 compliance matters in engineering and energy

Engineering and energy businesses rely on contingent specialists - commissioning engineers, nuclear SQEPs, HV cable‑jointers, project planners, and design consultants - to deliver safety‑critical outcomes against tight milestones. In practice, contractors often work alongside permanent staff and follow site protocols, which is exactly where IR35 risks arise if working practices resemble employment. Assessing status incorrectly can trigger tax liabilities for the end client and operational disruption if determinations are disputed mid‑project. HMRC’s guidelines now set clearer expectations for training, record‑keeping, status determinations, dispute management, and internal audits- benchmarks you can apply to large programmes and multi‑party supply chains.

NRL Group’s compliance and IR35 specialist Linx, warns against blanket decisions (e.g. personal service company (PSC) bans or automatic “inside IR35”), noting they rarely demonstrate reasonable care and can drive contractor exits, worsen talent shortages, and delay delivery. A balanced approach based on individual assessments, transparent communication, and fair options for in‑scope assignments protects capability and reputation.

 

IR35 fundamentals

What IR35 tests

IR35 examines how services are delivered, not just what the contract says. Core factors include:

• Control: If the client specifies how work is done day‑to‑day, an employment‑like relationship is more likely.
• Substitution: If the PSC can provide a suitably qualified substitute (and the client can’t unreasonably refuse), that supports genuine business status.
• Financial Risk: Genuine businesses take risk (e.g., specialist equipment costs, rectification work at their own expense, non‑reimbursed travel/accommodation).
• Mutuality of Obligation: No expectation of ongoing work beyond the agreed scope; the PSC delivers outcomes, not open‑ended employment. 
• Part and Parcel: Contractors shouldn’t be embedded like permanent staff (benefits, staff perks, social entitlements). 

 

Inside vs. outside IR35

• Inside IR35 (in scope): The fee‑payer deducts PAYE and employee NIC before paying the PSC. Employer NIC and apprenticeship levy apply. 
• Outside IR35 (out of scope): The PSC operates as a genuine business, handles its own tax, and invoices for services.

 

Who must determine status?

For medium and large private‑sector clients, the end client must issue a Status Determination Statement (SDS) for every assignment. Each assignment is unique—re‑engaging the same contractor still requires a fresh SDS. 

 

Determining status and proving “reasonable care”

The SDS “golden rules”

• One SDS per assignment. Never per person. Projects differ; practices change. 
• Document reality, not just contracts. Site supervision, working hours, approvals, tools, and integration all matter. 
• Review on long projects or when working practices change (e.g., new rota, client control increases, deliverables shift). 

 

Using HMRC’s CEST tool

The Check Employment Status for Tax (CEST) tool provides HMRC’s view based on inputs; HMRC say they will stand by its outcomes when information is accurate. It’s not mandatory, but it’s a strong element of reasonable care if combined with trained assessors and good records. Recent updates improved usability and guidance, but human judgment remains crucial to interpret working practices and evidence. 

 

HMRC’s GfC4 - a practical blueprint

HMRC’s Guidelines for Compliance (GfC4) cover: staff training, record‑keeping, making determinations, SDS handling, client‑led disagreement processes, operating PAYE, outsourcing responsibilities, and periodic internal audits. Benchmark your framework against GfC4 and address gaps - HMRC expect active governance to demonstrate reasonable care.

Key takeaway: NRL Recruitment highlights the same essentials in all areas of recruitment compliance - ongoing reviews, supply‑chain auditing, and refresher training - so hiring decisions remain accurate and defensible. 

 

Business impacts - financial, operational, and reputational

Financial risk

If HMRC overturns an “outside” determination, the end client can be liable for unpaid Income Tax and NIC, plus interest and penalties, and may be exposed to wider investigations. HMRC have also moved to address the ‘double taxation’ issue when reversing status (set‑off against taxes already paid by the PSC), but organisations should not rely on future relief—instead, build strong compliance now. 

 

Operational risk

Weak processes create bottlenecks: disputed SDSs, stalled onboarding, and disengaged supply partners, especially across multi‑site projects or complex supply chains. NRL’s guidance encourages documented workflows, trained decision‑makers, and supplier audits to keep programmes moving. 

 

Reputational considerations

Publicised blanket decisions or HMRC interventions harm brand trust with contractors and clients. Transparent, fair processes reduce disputes and protect talent pipelines in shortage areas.

 

Workforce planning implications

Budget for employer NIC and apprenticeship levy on inside assignments; model different payment routes (PAYE, umbrella, deemed PSC). Early role design and status assessment avoid last‑minute blanket calls and support project resource plans. 

 

Key learnings

Blanket PSC ban backfires

A large engineering client attempted a PSC ban to ‘simplify IR35,’ which led to contractor departures and programme delays.

Lesson: blanket approaches rarely show reasonable care and harm capacity. Commit to individual assessments, open communication, and fair routes for inside assignments (PAYE/umbrella/deemed payments). 

 

One inside assignment ≠ end of PSC

IR35 guidance reminds clients and contractors that status is assignment‑specific. A contractor may work inside IR35 on an embedded site role and outside IR35 on an autonomous design package. PSCs can remain viable with deemed payment for inside engagements and normal invoicing for outside ones. 

 

Compliance embedded in hiring operations

Teams with refresher training, SDS controls, and supplier audits demonstrate reasonable care and reduce disputes. Keep IR35 on the monthly or quarterly compliance agenda - legislation and case law evolve; as do site practices.

 

Following HMRC’s GfC4

Organisations that benchmark processes against GfC4 - training, records, SDS, disagreement, PAYE, internal audits - are better placed to evidence compliance during HMRC checks and correct errors proactively.

 

Modern considerations - AI, cross‑border, and supply chain

AI in compliance and recruitment

AI can help with document capture, audit trails, workflow prompts, and trend analysis (e.g., recurring risk factors in SDS decisions). NRL Recruitment cautions that AI in recruitment and engineering should enhance efficiency but not replace human judgment and must align with ethical standards and GDPR. In IR35, trained humans must still interpret working practices and oversee final determinations. 

 

Cross‑border delivery

IR35 is UK‑specific. International contractor engagements involve local tax, social security, immigration, payroll requirements. NRL Recruitment’s international services stress tailoring to in‑country legislation and ethical compliance - avoid assuming UK IR35 logic applies overseas. 

 

Actionable recommendations - dos and don’ts

Dos

• Build an IR35 playbook aligned to HMRC’s GfC4: training, records, SDS flow, client‑led disagreements, audits, error correction.
• Assess per assignment and reassess on long projects or practice changes; keep strong evidence files. 
• Use CEST as part of your toolkit; ensure trained assessors, retain outputs with SDS and contract files.
• Audit the supply chain (umbrella due diligence, fee‑payer controls) and pass SDSs down the chain promptly.
• Communicate transparently with contractors; run a fair disagreement process (45‑day response). 
• Refresh training and include IR35 in monthly/quarterly compliance routines; keep materials current with HMRC updates. 
• Plan budgets for employer NIC/levy on inside roles; model payment options and tax impacts across projects. 

Don’ts

• Apply blanket determinations or PSC bans; they rarely show reasonable care and damage capability. 
• Rely on the contract alone; HMRC weigh actual working practices heavily. 
• Skip periodic reviews: status can shift as delivery evolves. 
• Neglect documentation; weak records undermine defence during HMRC queries.
• Outsource and forget; even with third‑party support, you must evidence governance and reasonable care.

 

“Inside IR35 - now what?” Contractor options

When a contractor receives an inside IR35 determination, NRL Recruitment’s contractor guidance outlines viable routes:

• PAYE payroll (agency/in‑house), including auto‑enrolment;
• Umbrella employment (IR35 not applicable; PAYE/NIC handled by the umbrella);
• Continue via PSC with deemed payments deducted by the fee‑payer.
  
  

For clients, provide clear onboarding routes, explain tax and pay implications, and keep the candidate experience positive - this preserves talent relationships and future engagement options. 

 

Culture, values, and reasonable care

IR35 is more than a compliance hurdle. NRL Recruitment’s view: it’s a chance to demonstrate values - fairness, transparency, and accountability - through the way you design roles, assess status, communicate decisions, and manage disputes. HMRC explicitly cautions against blanket assessments and expects organisations to show reasonable care through training, documented decisions, and proper SDS distribution across the chain. 

 

Quick reference: HMRC Tools and Resources

• HMRC CEST - Check Employment Status for Tax (updated guidance and tool).
• HMRC GfC4 (Help to Comply) - 14 parts covering training, records, SDS, disagreement, PAYE, audits.
• Linx IR35 Support & Compliance - consulting, training, supplier auditing, and operational governance can be provided by the IR35 experts at Linx, part of the NRL Group.

 

Conclusion and next steps

IR35 compliance is continuous, not a one‑off implementation. For engineering and energy leaders, the prize is twofold: risk reduction (tax, legal, reputational) and operational resilience (uninterrupted access to specialist skills). The pathway is clear: assignment specific determinations, evidence‑rich decisions, trained teams, audited supply chains, and transparent contractor communications - aligned to HMRC’s GfC4 and backed by robust governance.

 

Partner with an IR35 compliance expert

Linx, part of the NRL Group, helps businesses manage IR35 by providing specialist support to reduce risk and ensure ongoing compliance with the off‑payroll working rules. Their IR35 support focuses on helping organisations put the right strategy, processes and controls in place when engaging contractors through Personal Service Companies (PSCs), including supporting accurate Status Determination Statements (SDS) in line with HMRC guidance. By offering expert oversight and practical support, Linx helps businesses navigate the complexity of IR35, apply the rules consistently across their contractor population, and demonstrate reasonable care in the event of HMRC scrutiny.

 

For transparency, AI has been used during the generation of this article, with every care taken to verify its accuracy.