Could HMRC’s New ‘Recklessness’ Tax Offence Affect Contractors and IR35?

For UK contractors, IR35 compliance has always been about more than simply deciding whether an engagement sits inside or outside IR35. It is also about being able to demonstrate how that conclusion was reached and ensuring the reality of the working practices and relationship support it.

A new HMRC proposal could make that emphasis on evidence and reasonable decision-making even more important.

The government has consulted on introducing a new criminal offence covering reckless untrue statements or declarations in relation to direct taxes. The consultation closed on the 16th August 2026.

While this does not mean contractors making innocent IR35 mistakes suddenly face criminal prosecution, it reinforces an increasingly important principle: contractors and businesses should take tax compliance seriously, document their decisions and avoid making assertions they cannot reasonably support.

What Is HMRC Proposing?

HMRC wants to address what it sees as an inconsistency between direct and indirect taxation.

There are already offences relating to recklessly making untrue statements in areas of indirect taxation. HMRC’s proposal would introduce a comparable offence for direct taxes.

Crucially, HMRC distinguishes recklessness from an innocent or careless mistake.

The consultation describes recklessness as circumstances where someone makes a statement while aware of a risk that it may be wrong. HMRC expressly states that innocent mistakes, misunderstandings and failures to take reasonable care would continue to be dealt with through existing civil regimes rather than the proposed criminal offence.

The proposal is therefore aimed at more serious behaviour rather than taxpayers who simply get something wrong.

Why Could This Matter For IR35?

IR35 and the off-payroll working rules are inherently judgement-based.

Determining employment status can require consideration of numerous factors, including:

• control;

• substitution and personal service;

• mutuality of obligation;

• financial risk;

• integration into the client’s organisation;

• provision of equipment;

• the overall business-to-business relationship; and

• importantly, what happens in practice rather than relying solely on contractual wording.

Depending on the circumstances and size of the end-client, responsibility for determining status can sit with different parties.

The proposed offence is not an ‘IR35 offence’. It would apply more broadly to direct tax matters.

Nevertheless, IR35 disputes can involve statements about working practices, contractual arrangements and employment status. This makes accurate information and good record keeping particularly important.

This Doesn’t Criminalise Getting IR35 Incorrect

This distinction deserves emphasis.

The proposal should not be interpreted as meaning that a contractor who incorrectly determines an engagement to be outside IR35 would automatically risk criminal prosecution.

HMRC’s consultation specifically acknowledges the need for safeguards and says innocent mistakes, misunderstandings and errors caused by failing to take reasonable care would remain within existing civil regimes.

For the proposed offence to apply, the issue would be recklessness, rather than simply being wrong.

The consultation has only just closed. The government will consider responses before deciding how to proceed, and HMRC says a summary of responses and any draft legislation will be published afterwards.

Contractors should therefore avoid treating headlines about a ‘new criminal offence’ as though the law has already changed.

Why Evidence Matters When Working Outside IR35

One practical lesson for contractors is the importance of being able to substantiate an outside-IR35 position.

A contractor should ideally be able to demonstrate that their status was properly considered rather than assumed.

That means looking beyond a contract containing favourable IR35 clauses.

For example, if a contract provides a genuine right of substitution, does that right realistically exist? If the contractor is described as having autonomy over how services are delivered, does the client actually exercise day-to-day control?

Evidence can become extremely important if HMRC subsequently challenges an arrangement.

Keeping contracts, status assessments, relevant correspondence and evidence of actual working practices can help establish why a particular conclusion was reached.

Independent IR35 Assessments Can Strengthen The Position

One way of improving this process is to obtain a structured IR35 assessment.

The Contractor Compliance Portal can be used to assess an engagement and document the factors supporting an inside or outside IR35 conclusion.

This can be particularly valuable for contractors because circumstances can change.

An engagement that genuinely begins on an outside IR35 basis could gradually evolve. Responsibilities may increase, working practices may change or a contractor could become more integrated into the client’s organisation.

IR35 compliance should therefore be treated as an ongoing process rather than a box ticked on the first day of an assignment.

Where Does IR35 Insurance Fit In?

Even contractors who have carefully assessed their position can still face an HMRC enquiry.

An investigation can involve professional representation, correspondence with HMRC and potentially a lengthy examination of contracts and working practices.

This is where specialist IR35 insurance can provide another layer of protection.

Depending on the policy and level of cover selected, IR35 insurance may provide cover for specialist defence costs associated with an HMRC investigation. Some policies may also provide further protection, covering the IR35 tax liabilities, interest and penalties deemed due by HMRC at the conclusion of an investigation and where a contractor working on an outside IR35 engagement was found to actually be inside IR35.

Insurance though should not replace good compliance. Instead, the two work together.

A contractor can assess their status, retain supporting evidence, periodically review their working practices and then use appropriate insurance to protect against the financial consequences of an HMRC challenge.

What Should Contractors Do Now?

There is no need for contractors to panic in response to HMRC’s proposal.

Instead, it provides another reason to adopt disciplined compliance practices.

Contractors working through limited companies should ensure that statements concerning their engagements are accurate, avoid relying purely on contractual wording, retain evidence supporting their working practices and review their IR35 position when an engagement materially changes.

Most importantly, an outside IR35 determination should be something that can be explained and supported.

The proposed offence remains just that,  proposal. However, the direction of travel is clear: HMRC continues to place considerable importance on accurate tax reporting and effective compliance.

For contractors, getting IR35 right and being able to demonstrate why it is right remains the best approach.

Protecting Your Contracting Business

Roots Contractor Insurance provides specialist insurance solutions designed for UK contractors, including IR35 insurance, Professional Indemnity, Public Liability and other contractor-focused covers.

Combined with an independent status assessment through The Contractor Compliance Portal, contractors can put both preventative compliance and financial protection around their business.