IR35 has become the contractors' bogeyman in recent years. Thanks to the unreliability of CEST, rife blanket employment status determinations in the public sector, and reports of HMRC's bully tactics, the UK's self-employed live in fear of having their taxes investigated. Even those who are ruled innocent - of which there have been many high-profile cases over the last 6 months - are dragged through months of anxiety, uncertainty, and expense.
In the words of Francis Bacon, knowledge is power - so what can you expect from an HMRC IR35 investigation?
Who can be targeted by HMRC for an IR35 investigation?
HMRC can open an investigation into anyone they suspect hasn’t been paying the correct taxes. These investigations tend to be based on a risk assessment basis, and generally target cases with the largest potential revenue.
Contractors may find themselves in the midst of an IR35 investigation for a variety of reasons. For example, it could be the result of working in a particular sector, due to the work of HMRC's Transparent Benchmarking team, or though exhibiting behaviours that make HMRC suspicious of your IR35 status. It also could be because of indirect reasons, such as being a result of an investigation into corporation tax, VAT or payroll.
The 8 stages specified of an HMRC enquiry
1. Initial IR35 investigation notification
In the initial notification, HMRC will inform you of exactly what they are looking into and what documentation they want, via ‘Schedule 36 Powers’. These powers allow HMRC to see your books, information and records. This will likely include the following:
- A copy of all contracts
- A copy of company accounts
- Details of expenses, especially travel and subsistence
- End client contact info
- Details of the agencies used to source and land contracts
- Details of the end clients worked for
- Descriptions of the services provided
- Your opinion as to if IR35 applies or not and your reasons for that decision.
- Any supporting evidence you wish to put forward
The above documents will be specified for a time period and will also be required by a set deadline clearly stated within HMRC’s correspondence.
2. Initial IR35 investigation response
The response to HMRC is a crucial stage in the process. If you have been proactive, you will have lowered your risk of any HMRC investigation by having your contract(s) reviewed, your working practices assessed and ideally have a confirmation of arrangements documents in place with the end client(s).
If you haven’t got the relevant insurance in place, there are specialists who are available and who usually charge by the hour to defend you. However, select wisely and look for someone with experience and evidence of being able to deal with these matters.
3. End client contact
HMRC will often want to contact the end client where your services were provided. Often a matter can rest on the evidence presented by the end client. You should ensure that your defence representation liaises with the client to ensure they are aware of the situation. While HMRC will have a preference to meet your client face-to-face or by teleconference, it is crucial to be aware that contact may be done in writing. Where this is the case, the letter may fall to the wrong person i.e. the Human Resource Department.
This can be very dangerous, as that person or department will have little to no idea what to do and how to respond, and more importantly, they will have even less of an idea about your relationship with the end client when you provided services there. This may mean that if they respond directly to HMRC, it could be with inaccurate evidence which could undermine the defence case being worked on by your representation.
4. Initial IR35 status decision
After the evidence is presented and reviewed by HMRC, a decision on your IR35 status will be made. If HMRC deems you outside IR35, they will close the enquiry and your company will not owe anything. If HMRC deems you to be inside IR35, they will raise an assessment to calculate the tac and NIC’s they believe your limited company owes. HMRC may also add a penalty for being deemed careless or deliberate, as well as interest.
5. Appealing the initial IR35 status decision
When HMRC have made their decision, you have 30 days to appeal. This is done by requesting the matter be escalated to the First Tier Tax Tribunal. However, to get a fixed date for a hearing can often take months. During this interim period, you have the option to use HMRC’s Alternative Dispute (ADR) Process. This has had varied success amongst contractors. The process sees an impartial facilitator from HMRC who has had nothing to do with the case bring the parties together in a meeting. The aim of this is to find common ground and resolve the issue. By taking this route, it has no detrimental effect on your case, so it is worth exploring. It also saves the time and costs associated with taking matters to the First Tier Tax Tribunal.
6. Escalation to Tax Tribunals
If the ADR process is taken and is unsuccessful, or is not explored, and no further evidence is presented, the matter can be heard by the First Tier Tax Tribunal. HMRC and your representative will both make their case to the judge. The Judge will issue a ruling based on the evidence presented and heard at the Tribunal. Both you and HMRC can appeal this ruling if they wish, taking the matter to the Upper Tax Tribunal. However, this can only be on a point of law, otherwise it must be heard in the higher courts. This process is virtually identical to the First Tier Tax Tribunal.
7. Escalation to higher courts
It is very rare for matters to reach this point; however, some cases require escalation to higher courts. Decisions made here often set a legal precedent, take a long time and cost a lot. However, as with every fair legal system, they ensure an independent and just outcome.
8. The final IR35 status decision
Ultimately, HMRC will find you inside or outside IR35. If you are found to be outside IR35, HMRC will not usually appeal this. This means the investigation is over and nothing is owed to HMRC. Where you are found to be inside IR35, the limited company owes arrears of income tax, NICs, interest and penalty payments minus Corporation tax relief for the deemed payment. HMRC will entertain settling. The amounts are due in full, and this could be financially crippling for a company
What does an IR35 status enquiry cover?
Our IR35 Tax Investigation insurance and IR35 Tax Investigation & Liabilities insurance products provide specialist representation at all the stages required in the event of an HMRC claim and extend to covering the liabilities due if found inside of IR35.
HMRC IR35 status enquiry for non-customers
If you aren't a Larsen Howie customer, or you are but you don't have one of our insurances that provide legal representation for an HMRC enquiry, we can still represent you to help bring about a swift and successful conclusion. Click here for full details.