HMRC is now using AI-enabled risk detection to find IR35 non-compliance, and the net has widened. The department appointed a Chief AI Officer in April 2026, and its analytics work has been credited with around £10bn in tax recovery. For contractors, agencies and umbrella companies, the message is plain: the off-payroll rules remain in force, enforcement is more targeted than ever, and errors that once went unnoticed are now surfacing faster.
This is not a change in the law. It is a change in how effectively the existing law is enforced.
How Is HMRC Using AI for IR35 Enforcement?
HMRC’s AI capability analyses large volumes of data to flag patterns that suggest a worker is being treated as self-employed when the working relationship points to employment. Instead of relying on manual case selection, the department can now surface anomalies across engagements at scale.
The practical effect is sharper targeting. Inconsistent status determinations, mismatches between contracts and actual working practices, and supply chains that do not add up are easier to identify. Enforcement activity using these tools has been live since May 2026.
For anyone who assumed IR35 risk had faded from view, the opposite is true. The rules are being worked harder, not softer.
Why Has Status Determination Shifted Back to Contractors?
Recent increases to the small-company thresholds have moved roughly 14,000 businesses out of the scope of the off-payroll working rules. When a client qualifies as small, responsibility for determining a personal service company (PSC) contractor’s IR35 status returns to the contractor rather than the end client.
This matters because it changes where the liability sits. A contractor working for a newly out-of-scope client is now making their own status call, often for the first time in years. Get it wrong, and the exposure is theirs.
What Contractors Now Need to Get Right
Contractors taking back status responsibility should focus on the fundamentals that determine employment status:
- Control: who decides how, when and where the work is done.
- Substitution: whether the contractor can genuinely send someone else.
- Mutuality of obligation: whether there is an ongoing commitment to offer and accept work.
These are the tests HMRC applies. A determination that is not supported by the actual working arrangement will not survive scrutiny, however it is labelled on paper.
What About the CEST Tool and the Political Noise?
Use of HMRC’s Check Employment Status for Tax (CEST) tool fell 71% year on year between 2023 and 2025. Whatever the reasons, fewer determinations are being run through the department’s own tool at precisely the moment its analytics are scanning for inconsistency.
On the political side, Shadow Chancellor Andrew Griffith signalled on 17 September 2026 an intent to replace IR35. No draft legislation and no timeline have been published. FCSA’s position is unchanged by statements of intent: the off-payroll rules are in force, HMRC is enforcing them, and compliance decisions must be based on the law as it stands, not on what might one day replace it.
Treating an unconfirmed proposal as a reason to relax now would be a costly misreading. The six-year look-back on past engagements does not pause for political speculation.
How Should Agencies and Umbrella Companies Respond?
The practical response is to tighten status governance across the chain:
- Confirm who is responsible for each status determination after the small-company threshold changes, and document it.
- Check that status determinations match actual working practices, not just the wording of a contract.
- Keep evidence. AI-driven enquiries move quickly, and a defence built after a letter arrives is weaker than one prepared before.
- Use genuinely compliant supply chains, where umbrella employment and PAYE are handled to a recognised standard.
FCSA Accreditation exists to give recruiters and hirers confidence that the providers in their chain operate compliantly. It is not a substitute for a correct IR35 determination, but it removes a category of risk from the supply chain around that determination.
AI has not rewritten the off-payroll rules. It has made them far harder to ignore. The contractors, agencies and umbrella companies who treat status as a documented, evidence-backed decision are the ones who will come through an enquiry intact.
To work with providers assessed against recognised compliance standards, consult the FCSA Members register and read more on FCSA Accreditation.
Sources
- FCSA, “IR35 Enforcement 2026: HMRC Turns to AI Detection” (28 September 2026): https://www.fcsa.org.uk/ir35-enforcement-2026-hmrc-turns-to-ai-detection/
- HMRC AI Officer appointment and tax recovery figures, as reported in the FCSA article above.
- Andrew Griffith statement on replacing IR35 (17 September 2026), referenced in the FCSA IR35 article.
