The IR35 legislation was introduced by HMRC as a means of identifying contractors who are not fully tax compliant.
Specifically, it was designed to challenge individuals who offer their services to clients via their own company (also known as a ‘personal service company’) or via Limited Liability Partnerships.
IR35, therefore, is an attempt by HMRC to prevent individuals from minimising their tax by claiming to be self-employed, when they are effectively disguised employees. Any IR35 investigation is therefore focused primarily on employment status.
What Triggers an HMRC IR35 Investigation?
If you receive a letter from HMRC titled ‘Check of Employer Records’, you should know that this is the usual trigger for an IR35 investigation. This letter will request a full breakdown of your limited company’s income, as well as copies of the contracts.
IR35 investigations are begun only if HMRC considers that to be a ‘reasonable risk’, so should take care to demonstrate as clearly as possible that you are outside IR35. If HMRC is satisfied with what you provided, the enquiry will be closed, whilst if they remain uncertain you’ll be asked for a face-to-face meeting.
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.
HMRC’s IR35 Decision Letter
Following your contact with HMRC, you will receive a letter informing you of their decision. As with all HMRC decisions, you have a right to object feel it is unfair and either have the matter looked at by HMRC’s reviews team, or appeal directly to a tax tribunal. If the tribunal rules against you, you have a further right to ask the higher courts to consider your appeal.
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.