What are the consequences of getting IR35 wrong?
Answered 11 March 2026
Consequences of Getting IR35 Wrong
The consequences differ depending on who gets it wrong and which regime applies (the older Chapter 8 rules where the intermediary self-assesses, or the newer Chapter 10 off-payroll working rules where the end-client determines status).
What the law says
Under Chapter 8 (intermediary self-assesses — typically small clients or pre-April 2021):
Where IR35 applies, the intermediary is treated as making a deemed employment payment to the worker, which is chargeable to income tax as employment income and subject to Class 1 NICs. This gives rise to an obligation to account for PAYE. If the intermediary fails to operate PAYE and NICs correctly, it bears the primary liability for the underpayment.
Under Chapter 10 (off-payroll working rules — medium/large clients from April 2021, public authorities from April 2017):
A PAYE liability will arise where a client (the deemed employer) has incorrectly determined that the off-payroll working rules do not apply to an engagement — i.e., it is treated as "outside" IR35 when it should be "inside." In those circumstances, the deemed employer will not have deducted income tax and NICs from deemed direct payments to the intermediary.
Where a client fails to issue a Status Determination Statement (SDS) and is not a small non-public sector client, any potential liability for tax, NICs and apprenticeship levy under the off-payroll working rules would rest with them.
HMRC Guidance / Practice
1. Deemed employment payment and PAYE obligation
If IR35 applies and the intermediary fails to operate PAYE, it is the intermediary's responsibility to work out an estimated payment of tax and NIC due from income received up to 5 April. This estimated payment must be paid to HMRC by 19 April. If the calculation cannot be made by that date, a payment on account should be made.
2. Transfer of liability
If the employment intermediary fails to apply the travel and subsistence expense rules (s.339A) correctly and allows tax relief incorrectly, any underpayment of tax may be transferred to the director(s) or officer(s) of the intermediary.
Similarly, under the MSC legislation, if a service company fails to operate PAYE and NICs, individuals can be held personally liable for the PAYE and NICs debts of the company.
3. Set-off of tax already paid
From 6 April 2024, where a deemed employer is found to have a PAYE liability due to an incorrect IR35 determination, HMRC can set off tax and NICs already paid by the worker and/or intermediary on the same income against that liability. This set-off applies to deemed direct payments made on or after 6 April 2017 (public authorities) or 6 April 2021 (medium/large private sector). The set-off is only triggered by specific events such as HMRC issuing a Regulation 80 determination or receiving a letter of offer.
4. Deliberate non-compliance and CEST
HMRC will stand by results from its CEST tool provided the information given is accurate. However, HMRC will not stand by results achieved through contrived arrangements deliberately designed to get a particular outcome — this is treated as deliberate non-compliance and carries a risk of financial penalties.
5. Soft-landing period
HMRC has indicated it would not use information from compliance activity to open new enquiries into earlier years for customers who are trying to comply with the off-payroll working rules in the first 12 months, unless there is evidence of deliberate non-compliance [748b7ba4ebda7cfc-related guidance].
In summary, getting IR35 wrong can result in: unpaid PAYE income tax and Class 1 NICs becoming due (with interest); potential penalties for inaccuracies or deliberate non-compliance; personal liability for directors/officers of the intermediary; and, for end-clients under the Chapter 10 rules, the PAYE liability falling on them as the deemed employer.
Citation sources
The intermediaries legislation, commonly referred to as IR35, is anti-avoidance legislation designed to stop individuals gaining a tax and National Insurance advantage by disguising their employment status. In an IR35 case, an individual provides their services to a client via an intermediary. The intermediary is usually a company but can also be a partnership or individual. The intermediary earns all, or most, of its income from supplying the individual’s services in circumstances that would be
You will able to review the answers before you get to the results page on CEST. Please note that CEST does not have a ‘save and return’ function. If you close CEST without finishing the questions, you will need to start from the beginning. In most cases, CEST will provide you with a result. HMRC will stand by the result provided the information is accurate and it is used in accordance with our guidance. Where there are subsequent material changes to contractual or working arrangements, the infor
The purpose of the legislation is to enable HMRC to set off an amount of tax and National Insurance contributions (NICs) paid or assessed by a worker and/or an intermediary on income from an off-payroll working (OPW) engagement against a liability of a deemed employer arising from a deemed direct payment. When the legislation will apply The set-offs legislation will apply from 6 April 2024 for deemed direct payments made on or after 6 April 2017. The set-offs legislation will only apply where
The aim of the legislation is to stop people avoiding paying tax and National Insurance Contributions (NIC) by using intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise, for tax or NIC purposes be regarded as an employee of the client; and engaged in employed earner's employment by the client. Before the introduction of the legislation, an individual could avoid being taxed as an employee, and paying Class 1 NIC on payments for
ave been within ‘IR35’ (see ESM3000 onwards), should consider carefully their and their company’s relationship with the MSC Provider. If a service company is within the MSC legislation and the company fails to operate PAYE and NICs, this could result in individuals being held personally liable for the PAYE and NICs debts of the company.
Liability to pay PAYE Income Tax and Class 1 NICs sits with the employment intermediary in the first instance where: an employment intermediary is within the scope of ITEPA, Part 2, Chapter 8 (the Intermediaries legislation) as described at [ESM5580] or Chapter 9 (the MSC legislation) as described at [ESM5570], and there is a deemed employment payment or a deemed employment payment would have been made but for the fact that the worker (or an associate) receives all the remuneration from the inte
yees or guidance at (ESM2500) when determining whether or not workers are office holders. Public authorities and medium or large-sized non-public sector clients must make this determination under the 6 April 2021 rules for any payments subject to the 6 April 2021 rules. See commencement provisions in ESM10001 and ESM10001A. Where the client is also the deemed employer (see ESM10017), it will also be responsible for the operation of PAYE (see ESM10019) and will have to deduct tax and NICs and acc