What Happens in an HMRC IR35 Investigation?
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.
What’s the IR35 Investigations Process?
If you are being investigated for IR35, the process generally works as follows:
- The investigation will be conducted by HM Revenue and Customs (HMRC), the UK government agency responsible for collecting taxes.
- HMRC will review the arrangements you have in place with the company or companies you provide your services to, as well as any contracts or agreements you have with them.
- HMRC will assess whether you are a “disguised employee” under the IR35 rules. In making this determination, they will consider factors such as the level of control the company has over your work, whether you are required to work set hours or follow set procedures, and whether you are required to provide your own equipment.
- If HMRC determines that you are a disguised employee, they will issue a determination stating that your limited company must pay taxes and NICs as if it were a regular employer.
- You have the legal right to appeal this if you disagree with it. The appeal process will involve a review of your case by an independent tribunal.
It is important to note that being investigated for IR35 does not necessarily mean that you will be found to be a disguised employee. However, it is essential to take the investigation seriously and seek professional advice if you need help with how to proceed.
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.
What to do if You are under IR35 Investigation
f you are being investigated for IR35, it is essential to take the following steps to handle the investigation effectively:
- 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.
- 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.
- 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.
- 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.
- 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.