IR35 and off-payroll working: The compliance landscape in 2026

Engaging off-payroll workers via personal service companies (PSCs) remains a widely used model five years after the 2021 off-payroll working private sector reforms took effect.

HMRC now expects a high standard of governance, with documented processes, robust employment status assessments and credible supply chain due diligence.

At the same time, HMRC’s approach to compliance is evolving rapidly, driven by advances in data analytics and artificial intelligence. These tools are already reshaping how HMRC selects cases, identifies anomalies and initiates investigations in relation to IR35.

There are also significant new compliance obligations on the horizon in 2026 concerning umbrella companies, which will materially increase risk for hirers and agencies.

There are significant changes that take effect from 6 April 2026 for umbrella companies that process payroll and handle taxes on behalf of clients and agencies.

Previously, if an umbrella company failed to correctly operate PAYE and NICs, HMRC typically pursued the umbrella company or individual contractor, rather than the agency for the outstanding liabilities.  

From April 2026, HMRC will be empowered to pursue unpaid liabilities from:

• The UK based agency, if there is one in the supply chain
• The end client, if no UK agency is present and is either offshore or has ties to the umbrella company 

This change dramatically increases risk for end clients and agencies, making them joint and severally liable where non-compliance occurs.

To remain compliant, organisations must undertake rigorous supply chain due diligence, including verifying PAYE and payroll processes, as well as checking accreditation and compliance credentials.

Information gathering is often difficult because umbrella companies may be unwilling or slow to provide full transparency. As risk increases, many organisations may prefer to put contingent workers on their own payroll.

The off-payroll working rules apply to medium and large private sector businesses, and the public sector, when a worker provides services through an intermediary (typically a PSC). These rules ensure that individuals who would be employees if engaged directly pay broadly the same tax and NICs as employees.

Businesses must be able to demonstrate that they have documented, repeatable and well governed processes that allow them to:

• Identify all off-payroll workers, whether engaged directly or indirectly
• Carry out robust employment status assessments and issue status determination statements (SDSs)
• Apply the correct tax treatment to the individual contractor bases on the status determination statement
• Handle any disputes and appeals effectively
• Undertake supply chain due diligence, identifying risks around agencies and intermediaries
• Conduct periodic re-assessments, especially where working practices evolve

There are many steps an organisation should take to ensure they are audit ready for a possible compliance review.  Whilst not limited to the following, an organisation should:

• Maintain a documented off-payroll working policy describing roles, responsibilities and workflows
• Provide training for those involved in the engagement process, such as hiring managers, procurement and HR
• Perform sample reviews of worker assessments and challenge conclusions
• Strength test supply chain due diligence, ensuring agencies and umbrella companies provide evidence
• Retain detailed documentation to demonstrate reasonable care in all determinations

During compliance reviews, organisations are often being asked how they use automated tools or digital workflows to improve consistency, reflecting HMRC’s own digitisation push.

HMRC’s compliance approach is undergoing a marked shift, underpinned by significant investment in AI, machine learning, risk scoring and data integration platforms.

HMRC’s connect system is central to identifying anomalies and potential IR35 risks. Connect draws on hundreds of data sources including PAYE, corporation tax, self-assessment filings, banking data and online platforms. These data sources are used to detect inconsistencies. 

The system has been upgraded to include automatic crossmatching across VAT, PAYE and corporation tax, as well as predictive anomaly detection, that will identify patterns commonly associated with non-compliance.

These capabilities allow HMRC to detect off-payroll risks at scale. For example, mismatches between contractor tax returns, fee payer PAYE decisions and end client filings.

HMRC has set out plans for using AI to detect non-compliance faster. These plans include the use of machine learning to detect anomalies, deep learning models for predictive risk scoring and AI systems to identify cases for investigations more rapidly.

This will mean that IR35 case selection will be increasingly data led and not random. 

IR35 remains a high-risk area of employer compliance, and one in which HMRC is becoming more sophisticated and successful in challenging. Employment status determinations must be defensible, consistent and well-documented.

The compliance landscape in 2026 will be shaped by AI-enabled HMRC risk detection using machine learning, predictive scoring and ‘connect’ based anomaly detection. This will lead to greater accountability on end clients, especially via the 2026 umbrella company reforms, as well as an increased frequency and depth of HMRC employer compliance reviews.

Businesses that invest now in robust processes, digital tools, governance frameworks and supply chain due diligence will be best placed to withstand HMRC scrutiny.

Our employer solutions team can help you understand the changes and are here to answer any questions. Please get in touch with your usual S&W contact or one of the contacts listed.

Approval code: NTEH7032615