Nobody relishes a tax enquiry. For those that have never clashed swords with HMRC during an investigation the fear of the unknown when that opening enquiry letter lands on their doorstep can be a daunting prospect.
Equally too, for those who have previous experience of a tax enquiry, the prospect of knowing what is to come can be as worrying and anxious. Tax enquiries are also disruptive to business, time consuming and costly for those without fee protection insurance and/or tax loss insurance.
Under the 'Revised Approach' to IR35 administration, HMRC have signalled their intention and commitment to reducing the length of time it takes to conduct an IR35 enquiry, although the contractor will have a part to play in this. The 'new style' IR35 enquiries, if we can call them that, are now underway, so it will be interesting to see how these are played out and if the Revenue's revised attitude has made the review process easier and swifter.
Contractors receiving the dreaded IR35 review letter will be asked at the very start, 'Have you considered IR35? If so why do you consider yourself to be outside of IR35. Please provide evidence to support this answer' or wording very similar to this. The letter will either be issued by one of the specialist IR35 teams housed in Croydon, Salford or Edinburgh, or one of the main tax offices. At this point, those holding tax fee protection insurance they should immediately contact their insurer and provide them with a copy of the letter to (1) validate their claim and (2) have an IR35 specialist assigned to their case.
Even for those contractors that do not have such insurance, the advice to them would be to seek the assistance of an IR35 expert. Whilst many freelancers are very much aware and well versed in IR35 matters, there will be very few who possess the experience of dealing with Revenue Inspectors on a regular basis and the knowledge of HMRC tactics and the extent of their powers.
If satisfactory evidence can be provided at this early stage then HMRC have given a promise that they will close down the review and furthermore to give an assurance to the freelancer that they will not bother them again regarding IR35 for the next 3 years.
Where evidence cannot be provided to the satisfaction of the Revenue Officer, then the enquiry moves on and it may be that HMRC will want to obtain information and/or test the contractor's evidence with the end client. This could take the form of a questionnaire or a meeting between the two parties. At this stage it is vital that HMRC communicate with a representative of the end client who is conversant with the contractors' working practices.
Too many times in the past, HMRC have been able to cement their case by speaking to the 'wrong' people of an end client, such as HR, legal or procurement. Once it is known that HMRC want to speak to the end client, the contractor and their advisor should be making every effort to get the client 'on side' and for the advisor to be offering their assistance. This is the opportunity to take some control of the situation and to prevent HMRC running roughshod over the end client.
If possible an end client should be dissuaded from agreeing to a meeting with HMRC unless they agree to the contractor and their advisor being present too. Many end clients panic when they are approached by HMRC and feel compelled to agree to a meeting when the truth is that such a request is not legally enforceable.
The powers afforded HMRC that are contained in Schedule 36 Finance Act 2008 are wide and can force an end client, or the contractor for that matter, to provide information but it does not extend to demanding meetings. Unfortunately, very few end clients are aware of this.
Whilst correspondence may draw out the enquiry process it does enable the right answers to be given provided the freelancer and advisor are privy to the draft responses to be given to the Revenue's questions. The suggestion here is not that evidence should be tampered with in any way whatsoever but rather that the entire facts are teased out of the end client and presented using correct terminology.
Once the fact finding exercise and gathering of evidence has been exhausted, HMRC will be in a position to make a decision one way or the other. If they are firmly of the opinion that a contract(s) is caught by the intermediaries legislation then they will issue Regulation 80 Determinations and Section 8 NIC Decisions for the PAYE tax and NIC liability arising for each tax year concerned. The contractor has 30 days to appeal against these.
After the appeal has been lodged a date then has to be fixed for it to be heard by the First Tier Tax Tribunal (FTTT). During that interim period arguments and fresh evidence can still be put forward to the Inspector. A contractor does not have to wait until the Tribunal hearing to present such evidence and nor should they do so.
A freelancer also has recourse to the Alternative Dispute Resolution process (ADR) and should be encouraged to do so where an impasse has arisen with the Inspector. There is absolutely nothing to lose but everything to gain as ADR does not prejudice a contractor's case. ADR involves another experienced Inspector, called a facilitator, casting a fresh pair of eyes over the case to date. This Inspector will have no previous involvement with the enquiry and their role is to objectively assist in bringing about agreement between the taxpayer and the original Inspector. Should this not be possible then the appeal will progress to the FTTT.
At the FTTT both sides will have their opportunity to present their case, including witnesses who can be cross-examined by either party. These witnesses will typically be end client representatives appearing for either the contractor or the Revenue. Once the arguments and facts have been presented and summing up concluded the Tribunal Judge will make a decision, usually several months later.
Should either the contractor or HMRC disagree with the judgement then an appeal can be made to the Upper Tier Tax Tribunal and from there to the higher courts. At this stage however legal proceedings can become costly. Even taking an appeal to the FTTT can cost between £5K – 10K at a conservative estimate.
The good news is that the majority of IR35 enquiries do not end up as appeals in the Tax Tribunal or beyond because – believe it or not – HMRC wish to avoid this as much as the contractor, although it may not appear that way at times!
Knowledge is power and many contractors possess this and coupled with the right expert in their corner they do not need to fear an IR35 enquiry.
Good, informative article.
So long as you keep a record of everything like you should, there really is no need to fear an IR35 investigation. My accountants gave me all the ir35 advice I needed. So I don’t see why people think it’s such a big deal. Or it this because they aren’t managing their businesses properly and don’t have accountants?