How HMRC's Off-Payroll Compliance Checks Unfold for a PSC

How HMRC's off-payroll compliance checks typically unfold for a PSC

If you contract through your own limited company (a personal service company, or PSC), the idea of an HMRC letter landing on the mat can be unsettling. Understanding the HMRC IR35 enquiry process in advance won't change your IR35 status, but it does help you respond calmly and provide the right information at the right time. This article explains, in general terms, what happens in an IR35 investigation, based on HMRC's own published guidance.

Who this applies to

Since 6 April 2021, the rules for who decides IR35 status have changed depending on who you contract with. For public sector clients and medium/large private and voluntary sector organisations, GOV.UK's off-payroll working guidance confirms it is the client's responsibility to determine whether a contractor is employed for tax purposes, and to issue a Status Determination Statement (SDS). HMRC's issue briefing on off-payroll working repeats this: from 6 April 2021, medium and large organisations carry that responsibility where services are provided through a PSC.

Where you contract with a smaller private sector client, the older rules still generally apply, meaning your own company retains responsibility for the IR35 determination. This is a separate question from who HMRC contacts during a compliance check, which is what this article focuses on.

The typical starting point: a letter

An off-payroll compliance check PSC enquiry doesn't usually begin with a knock on the door. According to GOV.UK's guidance on IR35 enquiries, HMRC will typically open an enquiry by writing to the company or business, asking it to:

• Explain the reasoning behind the decision that IR35 does not apply
• Provide a breakdown of income for the relevant tax year
• Provide copies of the written contracts covering work carried out in that year

This is the fact-finding stage. HMRC is trying to understand the contractual position and the reasoning behind the status decision that was taken, whether that decision was made by the PSC itself (pre-April 2021, smaller-client scenarios) or is being examined in the context of a client's SDS.

If HMRC still has concerns: a meeting, or continued correspondence

Having reviewed the written contracts, HMRC may conclude there is nothing further to pursue. But if, on the same guidance, HMRC still thinks IR35 may apply after examining the contracts, the next step is typically another letter, this time inviting the director (or a member of the partnership) to a face-to-face meeting.

Attendance at this meeting isn't compulsory. GOV.UK states that if the invitation is not accepted, HMRC will simply continue the enquiry in writing rather than insisting on a meeting. This matters for contractors who would rather manage the process through correspondence, with time to consider answers carefully, than in a live discussion.

Throughout this stage, the actual working practices, not just the wording of the contract, tend to be the focus. Reflecting the reasoning seen in cases such as PGMOL, HMRC's enquiry is likely to probe substitution rights and the degree of control exercised over how, when and where the work is done, rather than resting on any single clause or historic assumptions about mutuality of obligation.

Why pre-April 2021 years are treated differently

A common question in an HMRC contractor tax review is whether data gathered from clients under the newer off-payroll rules can be used to reopen older tax years. GOV.UK's guidance on this point is fairly narrow: enquiries into returns for tax years before 6 April 2021, based on information obtained through the off-payroll working rules changes, were limited to cases where there was reason to suspect fraud or criminal behaviour. This is a deliberate boundary, intended to stop the new reporting regime being used to trawl through historic years without good cause.

What evidence actually shows

It's worth being clear about what a contract review, an SDS, or a CEST result can and cannot do. An SDS or a professional contract review is evidence provided by the client (or commissioned by the contractor) about how the engagement was assessed; it is not proof, on its own, that a particular status is correct. Similarly, HMRC's own position is that CEST results are not determinative. Any of these documents can support a case during an enquiry, but the actual working practices on the ground are what ultimately matter.

Practical points for contractors

A few general points worth bearing in mind if you receive a compliance check letter:

• Keep contracts, statements of work, and any evidence of substitution or lack of control (schedules, correspondence, working patterns) on file for each engagement, not just the current one.
• Respond to HMRC's information requests within the stated deadlines, or explain promptly if more time is needed.
• Treat a request for a meeting as optional, and consider taking advice before deciding whether to attend or respond in writing.
• Remember that employment rights questions (such as holiday pay or worker status disputes) fall under the Fair Work Agency, which is separate from HMRC's tax-focused enquiry.

If you are currently searching for your next engagement, you can browse outside-IR35 contracts or check day-rate benchmarks on this site. For deeper background on how status is assessed, it's also worth reading our other IR35 guides on substitution and control.

Because every enquiry turns on the specific facts of an engagement, this article can only describe the general shape of the process. Contractors facing an actual HMRC enquiry, or wanting to understand their own position, should speak to a qualified IR35 contract reviewer or contractor accountant, and contact the Fair Work Agency for employment rights matters.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.