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The IR35 investigation process explained

How might an IR35 investigation against you play out?

For nearly 20 years, IR35 has been contractors’ bogeyman, with many industry experts questioning whether HMRC itself fully understands the legislation. A number of recent and high-profile IR35 Tribunals have seen Lorraine Kelly, Loose Women’s Kaye Adams, TalkSPORT’s Paul Hawksbee and ITV presenter Helen Fospero triumph against the taxman, leading to speculation that HMRC is simply playing a numbers game. However, The Treasury has also won a few cases itself this year –  against three BBC presenters and Christa Ackroyd. 

Taking into account HMRC’s policing of IR35 compliance, we thought it would be useful to examine the enquiry process to show you what the taxman is looking for during an IR35 investigation. 

First contact

In HMRC’s initial correspondence (typically a letter), the taxman will likely outline its case and could well request the following:

  • A copy of all contracts
  • A copy of company accounts
  • Details of expenses
  • End-client contact information
  • Details of the agencies used to source contracts
  • Details of the end-clients that you supplied services to
  • Descriptions of the services provided
  • Your opinion as to if IR35 applies and your reasons for that view
  • Any other supporting evidence you wish to put forward

It’s at this stage that contractors are recommended to contact an IR35 specialist, who will be well-placed to advise you on the best course of action. Needless to say, taking on the taxman alone is a daunting task.

Your reply

Your response to this notification can set the tone for the rest of the IR35 investigation. If you’re proactive, you can significantly lower the risk of a thorough investigation by having your contract or contracts and working practices reviewed. In an ideal world, you’ll also have a confirmation of arrangements document in place with your client. 

If your documents are all pointing towards an outside-IR35 determination, HMRC may not take it any further, saving you a lot of time, money and hassle. That said, judging by recent IR35 Tribunals, the tax office is willing to go the distance in fairly clear-cut cases.

End-client contact

HMRC will want to contact your client. In fact, a Tribunal result could rest on the evidence your clients put forward. If you’ve engaged the help of an IR35 expert, make sure they talk with your engager and ensure they’re aware of the situation, understand IR35 and its implications. HMRC will usually ask to meet your clients in person, but they may write to them instead. 

The initial IR35 status decision

After the evidence is presented and reviewed by HMRC, a decision on your IR35 status will be made. If the tax office agrees that you’re outside IR35, the investigation will be closed and your company won’t owe anything. However, if HMRC takes the view that you’re inside IR35, it’ll raise an assessment to calculate the tax it believes your limited company owes with interest as well as a possible penalty for being ‘careless’ or ‘deliberate’ in your perceived tax avoidance. 

Appealing this decision

You can appeal and request the matter to be escalated to a First Tier Tax Tribunal. Getting a fixed date for the Tribunal can often take months, but you can also use HMRC’s Alternative Dispute (ADR) Process in the interim. The ADR process can help to find common ground between you and the tax office with no detrimental effect on your case. It could save you a substantial amount of time and money at Tribunal.  

Escalating your IR35 case

Should you follow the ADR process and nothing is resolved, or you simply don’t go down that route, the matter can be heard by the First Tier Tax Tribunal. The Tribunal will generally involve both HMRC and your representative putting the case to a Judge, who will ultimately issue a ruling. Both you and HMRC can appeal this ruling, which would then escalate it to the Upper Tax Tribunal, where your case will be considered once more. 

Preventative IR35 measures 

It’s important to remember that HMRC can open an IR35 enquiry into anyone they suspect hasn’t been paying the correct tax.  The best way to avoid this is to regularly check that your contracts and working practices are IR35 compliant, regardless of the fact that from April 2020, contractors will not carry the liability unless they are engaged by a ‘small’ private sector firm. 

By Contractor Weekly

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