What Happens If HMRC Disputes My Employment Status? — IR35 and Worker Status UK 2026/27

HMRC disputes employment status when it believes a contractor or self-employed person is genuinely employed — and the consequences can include years of back-tax, National Insurance, interest, and penalties. Here is how status disputes arise, what HMRC looks for, and how to protect your position in 2026/27.

Two Types of Employment Status Dispute

Both routes can result in the income being reclassified as employment income — with Income Tax, employee NI, and employer NI all due.

The Three Core Employment Status Tests

HMRC (and the courts) apply case law tests developed over decades. The three most important factors are:

1. Personal Service

Must you personally do the work? If a genuine, unfettered right to send a substitute exists — and a substitute has actually been used — this points strongly towards self-employment. Contracts that include a substitution clause but where it has never been used (and the client would not accept a substitute) offer weak protection.

2. Mutuality of Obligation

Is the client obliged to offer work, and are you obliged to accept it? In a genuine employment, the employer keeps paying even between projects. A self-employed contractor who only works when a specific project exists — with no obligation on either side between engagements — is pointing away from employment.

3. Control

Does the client control what you do, when you do it, where you do it, and how you do it? An employee is typically subject to all four types of control. A genuine contractor determines their own methods and schedule, even if outcomes are specified.

Other Relevant Factors

No single factor is decisive. HMRC weighs all of them together.

IR35: How the Off-Payroll Rules Work

Since April 2021, the responsibility for determining IR35 status in medium and large private sector organisations (and all public sector bodies) lies with the client engager — not the contractor.

Client size definitions:

• Small private sector: two or more of: turnover ≤ £10.2M, balance sheet ≤ £5.1M, fewer than 50 employees → contractor self-assesses
• Medium/large private sector or any public body → client must issue a Status Determination Statement (SDS)

If the client determines “inside IR35”, they must deduct Income Tax and NI via PAYE before paying the contractor’s PSC. The PSC then receives net payment — not gross.

Key IR35 Figures 2026/27

What Happens If HMRC Opens a Status Enquiry

1. HMRC opens a compliance check — usually triggered by data mismatches, referrals, or sector-wide campaigns
2. HMRC requests information — contracts, working practices, correspondence with the client
3. HMRC forms a view — based on the facts, they determine inside or outside employment
4. If inside: HMRC issues assessments for unpaid PAYE and NI, plus interest from original due dates
5. Penalties: if HMRC considers non-compliance careless or deliberate, penalties of 15–100% of the tax owed apply
6. Appeals: you can appeal to the First-tier Tax Tribunal if you disagree

How to Protect Your Position

1. Use a robust written contract — ensure it accurately reflects the real working arrangement, not just what looks good on paper
2. Ensure substitution rights are genuine — not a clause that neither party would ever invoke
3. Maintain multiple clients — single-client arrangements are an immediate red flag
4. Use CEST — HMRC’s online tool (gov.uk/guidance/check-employment-status-for-tax) and keep a record of the result
5. Document working practices — keep notes showing how much autonomy you exercise in practice
6. Review each contract — status is assessed contract by contract, not globally

See our Self Assessment guide, HMRC voluntary disclosure guide, and self-employment tax guide.

Related Guide

• Self Assessment UK: Registration, Filing, Payments on Account and Penalties