If you’re a business owner in the UK, the thought of an HMRC IR35 investigation can be daunting. IR35 rules aim to tackle tax avoidance, specifically by contractors. However, understanding what happens during an investigation is crucial for ensuring compliance and mitigating risks.

This article will shed light on the key stages of an IR35 investigation and provide guidance on how to navigate the process.

What Happens in an HMRC IR35 Investigation

What’s the IR35 Investigation Process

Navigating an IR35 investigation by HMRC can be a complex and lengthy process. Understanding the key stages involved can provide clarity and aid in effective preparation.

Receiving the Initial Letter from HMRC

The first stage in an IR35 investigation is receiving an opening letter from HMRC. This is usually a formal letter titled ‘Check of Employer Records.’ It asks you to provide specific documents related to a certain tax year. HMRC wants to see if the work you did falls under the IR35 rules or not.

Gathering Documents for Submission

After you get the letter, you’ll need to collect a range of documents. HMRC will usually ask for your contracts, a list of payments you’ve received, and any invoices you’ve sent. You should also provide any additional documents like job descriptions and handbooks from your clients. Make sure to have everything well-organized before sending it off.

Fact-Finding Stage

Once HMRC has your documents, you move into the ‘fact-finding’ stage. HMRC might send you another list of questions about how you do your work. They will also send a similar list to your client. They want to compare both sets of answers to see if they match up. This is a critical part of the investigation and might take a long time to complete.

Further Correspondence or Meetings

HMRC might ask to meet with you to discuss your case. However, many recommend that you keep all communications in writing. This provides a clear record of what has been said and agreed upon. In this stage, you might also get more letters asking for further information or clarification on certain points.

Receiving a Determination Letter

After all the fact-finding and correspondence, HMRC will make a decision. If they decide you fall under the IR35 rules, they will send you a determination letter. This letter will tell you how much extra tax and National Insurance you have to pay.

Options After the Determination

If you get a determination letter and you don’t agree with it, you have some options. You can ask for a review by another HMRC officer, try to resolve the issue through mediation, or take your case to a judge. Each option has its own process and timeframe, so think carefully about which route you want to take.

Face-to-Face Meetings during IR35 Investigations

Although it is within your rights to refuse a face-to-face meeting, accepting HMRC’s invitation may lead to your enquiry being concluded more quickly.

The main purpose of these meetings is for HMRC to explore the details of the relationship between yourself and the client. HMRC will spend time examining written contracts, including the terms and conditions, to form a picture of the way you’ve been working.

If you’re maintaining that you are indeed a contractor, you’ll need to demonstrate that you are treated differently from your client’s employees (if they have any). This means you have the autonomy to manage your own assignments and that your working practices clearly indicate you are self-employed.

IR35 Penalties

If an IR35 investigation concludes that you have been effectively working as a disguised employee whilst posing as self-employed, HMRC will issue you a bill for the tax and National Insurance contributions due as well as accrued interest.

Depending on the circumstances of the case, there may be a penalty to pay here, which is calculated by assessing how much HMRC would have lost if they hadn’t realised what was happening.

What to do if You are under IR35 Investigation

if you are being investigated for IR35, it is essential to take the following steps to handle the investigation effectively:

  1. Seek professional advice: It is a good idea to seek the advice of a qualified accountant or tax professional, such as ourselves, who has experience in dealing with IR35 investigations.
  2. Gather all relevant documents: You will need to provide HMRC with various documents as part of the investigation process, including contracts, invoices, and other documentation related to your working arrangements. Make sure that you have copies of all relevant documents and that they are organized in a way that makes them easy to access.
  3. Cooperate with the investigation: It is important to cooperate fully with the investigation and to respond promptly to any requests for information or documentation from HMRC. Failure to cooperate may result in the investigation taking longer and could potentially lead to a more adverse outcome.
  4. Keep good records: Make sure that you have good records of your working arrangements, including contracts, invoices, and any other documentation that relates to the services that you provide. This will help you to demonstrate that your working arrangements are genuine and that you are not a disguised employee.
  5. Consider appealing the determination: If HMRC determines that you are a disguised employee and your limited company is required to pay taxes and NICs as a regular employer, you have the right to appeal the determination. You should seek professional advice on whether to appeal, and if you do decide to appeal, make sure that you follow the process carefully.

What Are the Consequences If You’re Caught by IR35?

  • If your work is classified as “inside IR35” from the outset, you’ll pay more Income Tax and National Insurance. This happens through direct deductions from your fees in public sector roles and by medium or large private businesses. For small private clients, you might be responsible for calculating and paying these taxes yourself at tax year end.
  • During an HMRC compliance check, your work for a medium or large client might be reclassified as “inside IR35” even if it wasn’t initially categorised that way. In this case, assuming everyone involved followed the rules, the responsibility for any unpaid taxes, interest, and penalties typically falls on the fee-payer (the organization paying you). This means they, not you, would be liable for settling the additional tax bill.

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