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Despite best efforts to maintain compliance with the IR35 legislation, HMRC may still open an investigation into your accounts.
It will usually begin with a request for information relating to a specified accounting period and require evidence as to your IR35 status. From here investigations range from a matter of weeks with no further information required - to years of back and forth and in some instances an appearance at a Tax Tribunal.
Having successfully defended in excess of 1,600 HMRC investigations, and saved contractors over £35m in tax, we know the investigation process, HMRC terminology, and tactics well and are able to confidently defend contractors against HMRC. Our Head of Tax is a former HMRC Inspector of Taxes himself, providing Qdos with the first-hand experience needed to handle IR35 investigations. As one of the few true IR35 experts, we have been involved with the IR35 legislation since it began, following every amendment and relevant case.
Below you will find information about IR35 investigations, the process involved, real-life experiences as well as how to handle an investigation should you receive such a letter.
IR35 investigations can be time-consuming and costly, as well as stressful, therefore it is worthwhile having an independent specialist to handle this on your behalf. Qdos have a dedicated team of IR35 status experts that can not only help with contract reviews and IR35 queries but are also able to represent you in IR35 investigations.
We are able to represent you whether you are insured or not. Uninsured clients often do not know where to turn, but we are happy to assess your situation and the case for you. We are also happy to take on a case after it has already started, to reach a settlement preferable to you. We have picked up HMRC cases that are already well into the investigation process and have saved clients a lot of money in doing so.
Please contact our consultancy team on 0116 269 0992 or [email protected] for more information
Since the implementation of the off-payroll working rules, one of the main changes to how an enquiry is initiated is that rather than the contractor being approached, HMRC begins proceedings with the end client for that engagement.
This is unless you are contracted with a small company, in which case you remain the primary target for enquiries.
The initial letter asks for more information from end clients after the reform than it ever asked from contractors before.
For example, it asks the end client how many contractors they engage and how many of these contractors fall inside or outside of IR35. In addition to this, HMRC asks the end client to identify those contracts that are outside of IR35.
From the addition of these questions, there are concerns that we may go on to see an increase in blanket IR35 enquiries like those that we have seen from HMRC in the public sector.
It is important to first note the difference between engaging in contracts that are initially determined to be inside IR35, and engaging in contracts that are assumed to be outside but then following an enquiry by HMRC are found to be inside.
If you provide services for an engagement that is initially considered inside IR35, there will be no ‘consequences’ so to speak, other than that you will have a higher rate of tax and National Insurance deducted at source by the fee-payer in any engagements with public sector bodies and medium or large businesses, or need to make a deemed payment at the end of the year for the same if engaged with a small client in the private sector.
If, on the other hand, you are providing services to a medium-large end client and found to be inside IR35 through an enquiry by HMRC, liability for this will generally sit with the fee-payer in the engagement if everyone has met their obligations. Meaning the fee-payer will be responsible for repaying any overdue tax and National Insurance as well as any interest or penalties that may have built up.
It should be noted that contractors providing services for 'small' end clients will remain responsible for their IR35 status, as well as for any services provided in the private sector prior to 6th April 2021..
Something you should keep in mind is that an enquiry from HMRC should not be taken lightly, not only is it stressful, but the proceedings can continue for an extended amount of time. When you consider the costs of defending yourself against an enquiry from HMRC, it is easy to see how quickly that number could rise. Because of this, it is increasingly important that contractors have adequate IR35 insurance in place to protect their businesses. For more information on our IR35 offering for contractors, see here.
Once all avenues have been exhausted, the time will come for a decision on the contractor’s status to be made.
The contractor will either be found to be inside or outside of IR35.
If found to be outside of the legislation, the enquiry will close in the contractor’s favour.
If the contractor is found to be inside IR35, the inspector will raise an assessment for the tax and NICs HMRC believe are owed by the contractor’s limited company under the IR35 rules.
HMRC will issue two assessments for the enquiry period:
There is the potential for a penalty to be added should the inspector decide that the avoidance of paying the correct tax was due to behaviour that was careless or deliberate on the contractor's part.
At this stage, a contractor’s advisor would appeal against both of these assessments and request that all additional liabilities be postponed until the investigation is settled.
The contractor has 30 days to appeal to the decision and request that the case be taken before the first tier tax tribunal. It can take months for this to happen and the enquiry is not on hold during this time.
During this period, the contractor has the option of HMRC’s Alternative Dispute Resolution (ADR) process, which has proven to be very effective in some cases. This process sees both HMRC and the contractor and their adviser present their case in person to a facilitator- another HMRC inspector who has had no involvement in the case until this point, in the hope of reaching an agreeable outcome thereby avoiding the need to go to a tax tribunal.
It is worth the contractor trying this route as it has no negative impact on the case and can result in a positive outcome for the contractor in a reasonably fast amount of time, with an average turnaround of 45-90 days depending on the complexity of the case. This process can settle a case without the need to go to a future tribunal, which may have been scheduled.
In the event of an unsuccessful ADR and no further evidence coming to light, the case will be heard before the first tier tax tribunal. The process at this stage is relatively straightforward.
Both HMRC and the contractor’s advisor will prepare evidence to present to the tribunal judge. HMRC’s representative (usually an inspector specialising in appeal hearings) and the contractor’s advisor make their case to the judge.
Either can introduce witnesses to provide and support evidence, whom the judge can question.
It can be months before the judge issues a ruling based on the evidence presented during the tribunal. Both the contractor and HMRC can appeal this decision which will take the case to the upper tax tribunal where the process is repeated, often accompanied by additional evidence or witnesses.
In extreme cases, the case may proceed to a higher court.
If the contractor is found to be outside IR35 and HMRC do not appeal, the investigation is over and the regulation 80 and section 8 assessments are reduced to zero, however it is rare for costs to be awarded.
If the contractor is found to be inside IR35, their limited company will have to pay any unpaid income tax, NICs, interest, and potential penalties. This can be financially crippling for a limited company and it is too late at this stage to try and agree a settlement with HMRC.
The calculation of the final assessment is based on the ‘deemed payment’ the contractor would have earned during the contracts caught by IR35, minus a corporation tax deduction for the period in question.
HMRC keep their cards very close to their chest when it comes to exactly what could trigger an IR35 investigation. They have, however, stated that those receiving IR35 enquiries have been chosen entirely at random.
The potential triggers for an IR35 enquiry are acknowledged as being one of two things, either direct or indirect.
Indirect: Due to the outcome of another investigation into your business, for example, an investigation into VAT, you have caught HMRC’s eye. Because of this, they may choose to investigate your business further to determine IR35 status and check you are operating compliantly.
Direct: A direct trigger for an IR35 enquiry would be as simple as whether you meet HMRC’s ‘criteria’ for warranting an IR35 enquiry, which could be something as straight forward as low salary and high dividends.
What exactly are these ‘criteria’?
Again, this is something that HMRC has never divulged and it is doubtful that we will ever find out exactly what, if any, are the criteria that trigger an IR35 enquiry. Because of this, it is important to ensure that you are operating as compliantly as possible when it comes to your business. Whether this means having your engagements regularly assessed for their IR35 status, or following HMRC’s guidance to the letter, in general, it is best to avoid any tell-tale signs of non-compliance wherever possible.
HMRC have a three-tier system for determining how far they can look back into your engagements.
In the Compliance Handbook [CH54300] it states that “the onus of proof of careless or deliberate behaviour is on HMRC”. More information on penalties and so what may constitute 'careless' or 'deliberate' behaviour can be found in the Compliance Handbook [CH81110].
Maximise your chances of success with expert help in a tax enquiry
Reduce the impact of an IR35 enquiry with comprehensive IR35 insurance
A detailed review of your IR35 status in both written terms and working practices.
Between 2010-11, there were a reported 6,000 contractors identifying themselves as PSCs and paying taxes as inside IR35. HMRC however believes that this only equates to 10% of those who should be paying tax as inside IR35.
There have been 35 IR35 investigations which have gone all the way to tribunal from 2000 to 2020 - 15 of which were won in favour of HMRC, and 2 of which were split decisions. The total number of enquiries however which have not made it to tribunal is undisclosed, although considered to be in the thousands, as well as how many were found to be inside IR35.
While it is difficult to determine exactly how many contractors are classed as inside IR35, we can say that 91% of individual assessments undertaken here at Qdos via our Status Review platform are outside of IR35 (2017-2020).
Despite this, IR35 is very complicated, and undertaking assessments can feel like a daunting prospect for contractors, with HMRC often found to be treating cases as guilty until proven innocent.
By undertaking IR35 assessments, you can understand the true nature of your engagement and restructure accordingly in order to remain compliant.
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