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Understanding IR35 Compliance: A Guide for UK Accountancy Firms

ir35 rules

If you work with contractors or clients who engage them, IR35 is never really off the agenda. The legislation has changed significantly in recent years – and 2025 and 2026 have brought further updates that are already reshaping responsibilities across different client types.

For UK accountancy firms, the question isn’t just “what is IR35” – it’s how to stay across the rules, support clients through the assessments, and avoid the kind of compliance failures that attract HMRC scrutiny. This guide gives you the practical overview your firm needs.

What is IR35, and Why is it Relevant to UK Accountancy Firms?

IR35 is UK tax legislation designed to prevent what HMRC calls “disguised employment”, where a contractor works like an employee but uses a Personal Service Company (PSC) or other intermediary to pay less tax. The legislation targets the working relationship, not the contract. So even if a contract says “self-employed,” HMRC will look at the day-to-day reality of how that person actually works.

The IR35 rules that matter most for accountancy firms right now:

Working reality over contract wording.

IR35 status is determined by how a contractor actually works – not what the contract says. HMRC assesses three main factors: substitution (can the contractor send someone else?), control (does the client direct how and when the work is done?), and mutuality of obligation (is there an expectation of continued work?).

Off-payroll rules apply to medium and large businesses.

Since April 2021, medium and large private sector businesses have been responsible for determining a contractor’s IR35 status and issuing a Status Determination Statement (SDS). The liability for getting it wrong sits with the client, not the contractor.

The 2025 small company threshold change.

This is the update that’s caught many firms off guard. In April 2025, the small company thresholds were raised – turnover under £15m, balance sheet under £7.5m, fewer than 50 employees (meeting any two qualifies as small). This reclassified approximately 14,000 businesses as small, and for contractors working with those clients, IR35 responsibility shifted back to the contractor’s PSC from April 2026.

If your clients are close to those thresholds, it’s worth reviewing whether their size classification has changed because their IR35 obligations may have changed with it.

How Do IR35 Responsibilities Differ by Client Size and Sector?

This is where the IR35 rules get more nuanced – and where accountancy firms add the most value to their clients.

Small businesses

IR35 responsibility sits with the contractor’s PSC. The client doesn’t need to issue an SDS, and the liability doesn’t fall on them if the contractor gets their status wrong. However, contractors now have the right to request confirmation of a client’s size, and the client must respond within 45 days. If a client has recently been reclassified as small under the new thresholds, they need to understand what that means for their existing contractor arrangements.

Medium and large businesses

They must assess each contractor engagement and issue a Status Determination Statement. HMRC penalties for getting this wrong are steep: 70% of unpaid tax if HMRC finds a deliberate mistake was made but not acted on, and up to 100% if there’s evidence of active concealment. These are not theoretical risks – HMRC is actively running compliance checks, and firms with weak assessment processes are the ones getting caught.

Public sector

IR35 rules have applied to the public sector since 2017, so most public sector clients will have established processes. But if your firm advises public sector bodies, it’s worth reviewing those processes periodically, particularly when contractors change or contracts are renewed.

Umbrella companies

New legislation affecting umbrella companies came into force in April 2026, introducing tighter regulation of how they operate. If your clients use umbrella companies in their contractor supply chain, this is an area to monitor closely.

How Can Accountancy Firms Support Clients With IR35 Status Assessments?

This is really where IR35 compliance becomes a service opportunity, not just a compliance obligation.

Most medium and large businesses know they’re responsible for IR35 assessments but many don’t have the internal expertise to do them well. That’s where accountancy firms come in.

Help clients build a consistent assessment process. A reliable IR35 assessment isn’t a one-off checkbox exercise. It should be applied consistently across every contractor engagement. Firms can help clients develop a structured approach: reviewing contracts, assessing actual working practices, issuing compliant Status Determination Statements, and maintaining documentation that holds up under HMRC scrutiny.

Review contracts, not just tick boxes. HMRC doesn’t just look at contracts – they look at working reality. Clients who assess status based on contract wording alone are exposed. Accountancy firms that review both the contract and the practical working arrangement are providing genuinely useful IR35 support.

Flag the threshold changes. Many clients still don’t know about the April 2025 small company reclassification. If a client has crossed the threshold in either direction, their IR35 responsibilities have changed. Proactively raising this is exactly the kind of timely, relevant advice that strengthens client relationships.

Support during HMRC investigations. If a client receives an IR35 compliance check from HMRC, having well-documented status determinations and a clear audit trail makes an enormous difference. Firms that have helped clients build good records from the outset are far better placed to support them through an investigation than those scrambling to reconstruct documentation after the fact.

Befree’s accounting outsourcing services provide accountancy practices the capacity to take on more advisory work – including IR35 support – without stretching internal teams. Handling the day-to-day financial work means your qualified staff can focus on higher-value client advisory, including IR35 compliance support.

IR35 Isn't Going Away – But It Is Getting Clearer

The good news for accountancy firms is that after years of uncertainty, the IR35 landscape is more settled than it’s been in a long time. The Supreme Court has clarified the legal principles, HMRC’s compliance approach has become more proportionate, and firms with strong processes are passing checks cleanly.

The firms that serve their clients best here aren’t the ones with the most complex IR35 tools – they’re the ones that stay up to date, communicate changes proactively, and build assessment processes that hold up when HMRC comes knocking.

Contact our team today to find out how Befree supports UK accountancy firms with the capacity to deliver better client advisory.

FAQs

What is IR35?
IR35 is UK tax legislation that targets “disguised employment” — where a contractor works like an employee but operates through a Personal Service Company to reduce their tax liability. HMRC looks at the working reality, not just the contract.
It depends on client size. Medium and large businesses must assess contractor status and issue a Status Determination Statement. Small businesses — under the new April 2025 thresholds — pass that responsibility back to the contractor’s PSC.
Following the April 2025 threshold changes, small companies are now defined as meeting two of: turnover under £15m, balance sheet under £7.5m, fewer than 50 employees. For contractors working with newly reclassified small clients, IR35 responsibility shifted back to their PSC from April 2026.
HMRC penalties range from 70% of unpaid tax for errors that were identified but not acted on, up to 100% for deliberate concealment. HMRC can also assess up to 20 years of back taxes in cases of deliberate non-compliance.
By reviewing contracts against actual working practices, helping clients build consistent Status Determination Statement processes, flagging changes in client size classification, and maintaining documentation that supports clients during HMRC compliance checks.

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