IR35 Compliance in Recruitment: Are You at Risk of Costly Non-Compliance?

Written By Dena Hyett

IR35 compliance has become one of the most pressing issues for companies using contractors and temporary workers. Since the changes to off-payroll working rules in 2021, the responsibility for assessing a contractor’s tax status has shifted, and the risks of getting it wrong are higher than ever.

Many businesses still do not fully understand their obligations. Non-compliance can result in serious consequences, including financial penalties, backdated tax liabilities and reputational harm. At Vermelo RPO, we help organisations identify their exposure and stay ahead of the risk.

Here’s what you need to know.

What is IR35?

IR35 is tax legislation introduced to prevent “disguised employment.” It targets individuals who provide services through a limited company but whose working practices resemble those of a direct employee.

HMRC’s goal is to ensure that people who effectively work as employees pay the same tax and National Insurance as permanent staff. If a contractor falls inside IR35, they are classed as an employee for tax purposes, and the correct deductions must be made.

Who is Responsible for IR35 Compliance?

Before 2021, the responsibility for determining IR35 status sat with the contractor. That changed with reforms to off-payroll rules in the private sector.

Now, if you are a medium or large-sized company, the obligation falls on you — the hiring organisation — to determine the IR35 status of each contractor you engage. Small businesses are exempt if they meet at least two of the following conditions:

  • Annual turnover not more than £10.2 million

  • Balance sheet total not more than £5.1 million

  • Not more than 50 employees

This shift in responsibility has created a complex landscape for recruitment and HR teams who are now required to assess each engagement carefully.

Signs You May Be Non-Compliant

You may already be at risk without realising it. There are several red flags that HMRC uses to judge employment status. If these apply to your contractors, it may indicate a failure to comply with IR35 regulations:

  • Tight Control: Contractors should not be tightly supervised. They should decide how, when and where they deliver the work. If they follow your internal policies like employees, this could suggest misclassification.

  • No Business Risk: Genuine contractors operate as businesses. If there is no risk to them — for example, they get paid regardless of outcome or never fix work at their own cost — this weakens their status as independent.

  • Use of Company Equipment: Providing laptops, office space or tools can suggest an employer relationship. Independent contractors should generally use their own equipment.

Each of these signs could trigger scrutiny. If HMRC believes your contractors are inside IR35 and you have treated them as outside, you could be liable for underpaid tax and National Insurance going back several years.

The Risks of Non-Compliance

Failing to meet IR35 obligations carries serious financial and legal consequences:

  • Backdated Tax and National Insurance: HMRC can demand repayments covering several years, plus interest on what is owed.

  • Penalties: Where non-compliance is judged to be deliberate or careless, additional fines of up to 100 percent of the unpaid tax may apply.

  • Reputational Damage: Investigations can attract negative attention. Clients and contractors may lose trust in your ability to manage engagements properly, which can hurt future business opportunities.

  • Increased HMRC Scrutiny: Once flagged, your organisation may face repeated audits and further investigations.

How to Ensure IR35 Compliance

Getting IR35 right requires more than a checkbox approach. You need ongoing awareness, proper documentation and expert support.

Here’s what we recommend:

  • Review All Contractor Engagements: Don’t rely on assumptions. Each role and contract should be reviewed on its own merits. Job titles alone do not define status — the actual working relationship matters.

  • Seek Expert Input: IR35 rules are complex and you don’t want to get it wrong. If you’re unsure, speak to specialists. At Vermelo RPO, we provide clear, informed guidance based on current HMRC expectations.

  • Maintain Evidence: Keep detailed, auditable records of contracts, decisions, communication and risk assessments. If HMRC does investigate, you need to show your reasoning and process.

  • Use the Right Assessment Tools: Government tools like CEST (Check Employment Status for Tax) offer a starting point, but expert interpretation is often needed to ensure the output aligns with actual working conditions.

What a Good IR35 Process Looks Like

Strong IR35 management in recruitment isn’t just about avoiding penalties. It also gives contractors confidence and supports smooth project delivery.

A good process should include:

  • Clear contractor vetting at point of hire

  • Independent IR35 status assessments

  • Transparent communication with contractors about their status

  • A plan for roles that fall inside IR35

  • Regular compliance reviews

By embedding IR35 into your recruitment process from the start, you avoid disruption and protect your organisation.

How Vermelo RPO Can Help

We work with companies across the UK to reduce IR35 risks and strengthen contractor engagement. Our team understands the legal, financial and operational challenges businesses face and can help you navigate them with confidence.

We offer IR35 audits, support with documentation and help you manage contractor relationships in a compliant, future-proof way.

In addition to IR35 support, Vermelo RPO also provides:

Let’s Talk IR35

If you’re not confident in your IR35 approach, now is the time to act. The longer you leave it, the greater the risk. Vermelo RPO is here to help you assess, protect and prepare.

Contact us today to schedule your IR35 compliance review and safeguard your business from unnecessary cost and reputational damage.

01892 553360 | info@VermeloRPO.com

Dena Hyett
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