HMRC has deployed AI-enabled risk detection across PAYE, self-assessment and company accounts, and IR35 enforcement is sharper for it. Since May 2026, contractors operating through personal service companies (PSCs) face heightened scrutiny of status determinations, with no safe harbour for those who get it wrong.
The shift matters most for the growing number of PSC contractors who now self-determine their status following changes to the small-company thresholds. More determinations sit with contractors and small clients, and HMRC has better tools to spot the weak ones.
How Is HMRC Using AI in IR35 Enforcement?
HMRC’s risk-detection systems cross-reference data across PAYE records, self-assessment returns and company accounts to flag patterns that warrant a closer look. Inconsistencies that once slipped through now surface faster.
For IR35, that means a contractor whose working practices look like employment but whose return says otherwise is more likely to be identified. The technology does not decide status. That still turns on the facts of the engagement. What it decides is who gets asked to prove it.
HMRC’s commitment here is not rhetorical. It appointed its first Chief AI Officer in April 2026, and its 2025-26 annual report credits AI-enabled analytics with protecting £10bn of tax recovery through better targeting of compliance activity. The practical effect is a lower tolerance for guesswork. A determination that cannot be evidenced is a determination that invites enquiry.
Who Now Carries the Status Determination Risk?
With the small-company threshold increases, more PSC contractors are back to self-determining their own IR35 status rather than relying on a client’s determination. That returns both the decision and the liability to the contractor.
This is a meaningful change. Under the off-payroll rules for medium and large clients, the end client makes the determination and the fee-payer carries the deduction risk. Where a client qualifies as small, the pre-2021 position applies and the PSC decides for itself. HMRC has modelled an annual tax loss of around £20 million linked to these shifts in business-size classification, so the area is squarely in its sights.
Contractors in that position should be clear on three points:
- A status determination must reflect the actual working practices of the engagement, not the wording of a contract in isolation.
- Determinations are not set once and forgotten. They must be current for the engagement as it is worked.
- If HMRC challenges a determination, the contractor must be able to produce the reasoning and evidence behind it.
There is no statutory defence for an honest mistake here. A defensible position is one you can document at the time, not explain after the fact.
HMRC’s own Check Employment Status for Tax (CEST) tool offers less cover than it once did. Freedom of Information data obtained by IR35 Shield shows CEST usage fell 71 percent between 2023-24 and 2024-25, from 458,894 determinations to 135,178, and dropped a further 43 percent during 2025-26. Users are voting with their feet, and a CEST output is not a substitute for a properly evidenced status position.
Is IR35 About to Be Replaced?
IR35 remains in force, and FCSA does not speculate on legislation that has not been confirmed. That said, the political noise around reform has grown. On 17 September 2026, the Shadow Chancellor, Andrew Griffith, said a Conservative government would ‘replace’ IR35 with a new system.
There is no draft legislation and no timeline. For anyone operating today, the rules that apply are the rules currently in force. Planning around a reform that may or may not happen is not a compliance strategy. It is a gamble.
The sensible response to political uncertainty is the same as the response to AI-enabled enforcement: keep determinations current, documented and grounded in how the work is actually done.
What Should Contractors and Agencies Do?
The combination of sharper detection and more self-determination raises the cost of a sloppy status position. Contractors working outside IR35 should hold contemporaneous evidence of their working practices, including substitution rights exercised in practice, control over how work is done, and genuine financial risk.
Where the end client is medium or large, the determination and the fee-payer’s deduction risk still sit within the supply chain. Agencies acting as fee-payer in those arrangements carry real exposure and should ensure the providers they work with can stand behind their status processes.
Working with compliant providers reduces that exposure. FCSA Members operate to assessed standards covering employment status and supply-chain compliance, giving agencies and contractors a documented basis for the arrangements they enter into.
Contractors and recruiters navigating IR35 in 2026 should review the compliance standards behind FCSA Accreditation and verify their providers on the FCSA Members register. In an environment where HMRC can find the weak determinations, the answer is to make sure yours is not one of them.
