Five Red Flags That Could Lead To An HMRC IR35 Investigation

Working independently as a contractor? You know how vital it is to stay on the right side of the rules. But here’s the thing – even when you’re doing everything you think you should, certain patterns can make HMRC dig deeper. At Roots Contractor Insurance we see the stress it causes, so let’s walk through five warning signs that could lead to an HRMC investigation into your IR35 status, and what you can do about each.

1. A wage-dividends split that raises eyebrows

One common scenario: a contractor takes a minimal salary and then extracts most of the business’s profits as dividends. On the face of it, that’s perfectly fine, many legitimate contractors do exactly this. But the risk comes when HMRC interprets it as trying to mimic employment while avoiding employee National Insurance and higher tax. 

What to do: Make sure your pay structure is defensible. If you’re genuinely running things as a business (taking risk, investing, making decisions) then the split is easier to justify. Keep solid records; consider professional advice. And don’t forget – being cautious about taking a very low salary might be wise rather than leaning into the extremes.

2. Too much income from a single client

If most of your earnings come from just one client, HMRC may see it as a sign you’re effectively an employee of that client rather than an independent contractor. The term ‘Mutuality of Obligation’ gets dragged in here: the idea that the client expects you to accept work, and you expect the client to provide it. 

What to do: It may not always be practical to scatter your income across multiple clients, especially in specialist sectors. But you should:

• have a contract that clearly shows your independent status (e.g., right of substitution, no control, no guarantee of ongoing work)

• try to diversify your client base where possible

• keep evidence of being a genuine business in your own right (marketing activities, investing in personal training, having a website).

  That way, if HMRC asks, you can show you’re acting like a business, not an employee.

3. Blurring the boundaries: becoming ‘part and parcel’

This one’s subtle but dangerous: if your working arrangements make you feel, and look, like an employee of the client, HMRC may use it as evidence you’re inside IR35. Examples include: a dedicated desk, company email address, signing internal documentation, or being treated as a staff member would be/is rather than a self-employed contractor. 

What to do: Keep your independence obvious: show you’re not integrated into the client’s business in the same way as their staff. Use your own equipment where feasible, maintain your own working hours or methods (within reason), avoid being treated like a staff member of the client. The written contract matters, but the actual ‘working practices’ matters more.

4. Internal tax or accounting issues triggering broader scrutiny

This one isn’t about your contract directly, it’s more indirect. If HMRC spots something odd in your, corporation tax, VAT or other required filings, they may dig deeper, and once they’re in, they might look at your IR35 status too. 

What to do: Keep your bookkeeping and tax filings spot-on. Errors, inconsistencies or unusually big swings in profits, expenses or turnover can raise flags. Even if your IR35 position is solid, poor tax discipline elsewhere might attract attention you’d rather avoid.

5. It’s not always about you: the wider ecosystem matters

HMRC doesn’t just examine contractors in isolation. Client practices, agency arrangements, contract-chains etc all count. If the client engaging you or any part of the IR35 labour supply chain implements any practices that might be deemed close to the line, you may face higher risk as a result. 

What to do: Check how your client and agency behave. Always ensure you have been provided with the Status Determination Statement (SDS), providing they’ve done one, and keep a copy. Review your written contract: does it allow substitution, are you genuinely free to provide the services in your way? Make sure the contract is amended to reflect best IR35 practice and independence. Finally, use a system such as The Contractor Compliance Portal to get a free IR35 assessment, or even better get the whole supply chain to use the system and then insure any Outside IR35 risks for £100,000 of representation cover and a further £100,000 of IR35 tax liabilities, interest and penalties cover.

Why all of this matters

Being outside IR35 is more than just tax savings (though that’s part of it). It’s about protecting your business model, avoiding unexpectedly large tax bills, avoiding the time drain, cost and stress of an investigation. At Roots Contractor Insurance we hear from contractors who didn’t realise how quickly things can escalate once HMRC starts questioning status.

Even if you never receive a formal enquiry, having your ducks in a row, and documented evidence of contractor reviews, working practices and SDS’s etc gives you peace of mind. Being prepared makes a difference.

What you can do right now

• Review your contract: get it checked, does it reflect your real working practice?

• Document your working practices: keep a log that shows you’re acting like a business, not an employee.

• Diversify your income: where you can, reduce reliance on a single client.

• Keep your tax affairs clean: don’t let bookkeeping or tax/VAT issues give HMRC a reason to look.

• If in doubt, get specialist help: IR35 is complex. A small investment now can avoid major headaches later.

Remember: it’s not just what you do, but how you do it, and how well you can show that to HMRC if needed.