IR35 and employment risk: what founders keep getting wrong

IR35 changed again in April 2026. More than 14,000 UK businesses have been reclassified under new size thresholds, compliance responsibility has shifted in ways most founders haven't caught up with, and HMRC collected over £500 million in IR35-related liabilities from businesses that got their determinations wrong in 2025 alone. Employment risk is not a footnote in a growing business. It's a cost line, a compliance burden, and for many founders, a liability they're still managing with the wrong assumptions.

Here's what the data says founders keep getting wrong, and what the 2026 changes actually mean.

Mistake 1: thinking "we're small, so we're fine"

The April 2026 threshold changes are the most significant structural shift in IR35 since the 2021 private-sector reforms. The definition of a "small company" now covers businesses with annual turnover up to £15 million (previously £10.2 million), a balance sheet total up to £7.5 million (previously £5.1 million), and up to 50 employees. A business only needs to meet two of those three criteria to qualify as small.

Around 14,000 UK companies have been reclassified from medium to small as a result. For those businesses, IR35 assessment responsibility has shifted back to the contractor's own company, not the end client. That sounds like less work. It is, until your business grows past the threshold, at which point the full compliance burden snaps back with retroactive implications for every engagement you didn't document properly while you thought you were exempt.

A fast-growing business can move from small to medium faster than it expects. During fundraising or an exit, poor contractor compliance and unclear employment status can create deal friction. Employment risk doesn't pause while you're scaling.

Mistake 2: trusting the contract, not the relationship

This is the most expensive mistake, and the most common. A contract that says "outside IR35" is not a defence if the day-to-day reality looks like employment.

How roles are designed, supervised, and integrated into the organisation has a direct bearing on whether an engagement can be defended as outside IR35. Engagements that resemble permanent roles, involve ongoing supervision, or embed contractors into internal reporting lines are more likely to fall inside IR35.

HMRC assesses working reality, not contract wording. If a contractor attends your internal meetings, appears on your org chart, uses your equipment, and receives work direction from your managers, the label on the paperwork is almost irrelevant. What's actually happening is what's being assessed.

Mistake 3: assuming the threshold change applies immediately

The thresholds rose on 6 April 2026, but the IR35 size test uses your previous financial year. Companies with an April-to-April financial year won't see the practical IR35 impact until April 2027. Planning around the wrong date is a live problem, and acting too early or too late on documentation can both create exposure.

The same principle runs in reverse for businesses dropping existing SDS documentation: if an engagement started while you were classified as medium, that engagement continues under the old rules until it ends. Retroactively unwinding correct documentation from the previous framework is itself a compliance error.

Mistake 4: treating employment risk as a contractor problem, not a business problem

The April 2026 changes shift IR35 liability back to contractors for newly reclassified small businesses. It's tempting to interpret that as the founder's risk going down. It doesn't.

Misclassification can trigger wider consequences beyond back-tax. Businesses may need to cover backdated employment costs including holiday pay, minimum wage differences, and pension contributions. Legal disputes and reputational damage impact the ability to grow and hire.

Beyond IR35 specifically, the broader employment risk picture for UK founders includes notice period obligations, statutory sick pay exposure, auto-enrolment pension requirements, and an Employment Rights Bill that's still expanding employee protections. These aren't risks that live in a separate compliance folder. They're the true cost of every hire or engagement that isn't structured correctly from the start.

What this actually costs

In 2025, HMRC collected over £500 million in IR35-related liabilities from businesses that had made incorrect determinations. Penalties can reach 100% of the liability where HMRC considers the non-compliance deliberate.

Add to that the cost of an investigation itself, the management time, legal fees, and disruption to relationships with contractors who may exit mid-project while a determination is disputed, and the real cost of getting this wrong is significantly higher than most businesses have budgeted for.

The alternative that most founders don't consider early enough

The cleanest way to remove employment risk from your business isn't better compliance documentation. It's removing the employment relationship from your plate entirely.

When Outsourcery places a professional through FLEX or DIRECT, it acts as the employer of record. Payroll, NI, pension auto-enrolment, statutory obligations, and employment compliance all sit with Outsourcery, not with you. You direct the work. The risk doesn't live on your balance sheet.

That's not a pitch against contractors, some roles are genuinely better served by a contractor model. But it is worth acknowledging that for ongoing roles, dedicated team members, and any position where the working reality was going to look like employment anyway, the cost of employment risk is already baked into what you're paying. The only question is whether you're managing it yourself or whether someone else is.

For founders who want to understand what that looks like in practice, the Outsourcery FAQ covers how the employer-of-record model works and who carries what.

FAQ

What are the IR35 threshold changes in 2026?
From April 2026, the small company thresholds increased. Businesses with annual turnover up to £15 million, a balance sheet up to £7.5 million, and up to 50 employees now qualify as small. Meeting at least two of the three criteria is enough. Around 14,000 UK companies have been reclassified as a result, shifting IR35 assessment responsibility back to the contractor's own company.

Does IR35 apply to my business if we're a small company?
If your business meets the new small company criteria, you are generally exempt from the off-payroll working rules and IR35 responsibility sits with the contractor's intermediary. However, this can change as your business grows, and poor documentation during your small-company period can create problems at exit or during fundraising.

What happens if I get an IR35 determination wrong?
HMRC can investigate retrospectively and demand unpaid income tax and National Insurance, plus interest and penalties. In 2025, HMRC collected over £500 million in IR35-related liabilities from businesses that made incorrect determinations. Penalties can reach 100% of the liability where HMRC considers non-compliance deliberate.

What is an employer of record and how does it remove employment risk?
An employer of record is a company that employs a professional on your behalf, handling payroll, NI, pension, statutory obligations, and employment compliance. You direct the work day to day, but the employment relationship and its associated risks sit with the employer of record, not with your business.