All Limited Company contractors are aware of IR35 and its risks. Being caught inside IR35 means extra taxes and National Insurance contributions, and sometimes even additional penalty. However, most contractors are not aware of the process of an IR35 enquiry. In this article, we look at the steps involved in an IR35 enquiry. We look at the enquiry through the example of Tim, a fictitious contractor, who is faced with an IR35 enquiry.
Every IR35 enquiry starts with a letter from Her Majesty’s Revenues and Customs (HMRC). The contents of the letter are focused on either the Limited Company’s tax year or its accounting period. HMRC can perform IR35 investigations for up to 6 years prior to the current year, but typically the opening letter is focused on a single tax year.
Tim gets a letter from HMRC, which is titled as ‘Check of Employer records.’ The letter mentions Tim’s company has been selected for a check, but there’s no mention of IR35 in the initial portion. Only in the later portion of the letter, there is a mention of IR35. The letter asked for the following from Tim.
As a next step, Tim is required to respond to the HMRC opening letter. This stage is very crucial. Because if the response and supporting material provided during this stage seem convincing to the HMRC, they will close the enquiry. Typically, HMRC provides 1 month to contractors to respond along with the supporting material.
It is advisable for contractors to take the help of professionals before sending a response to HMRC. If Tim has a legal insurance or insurance against tax enquiries, he should immediately contact his insurance provider. Note, however that some insurance policies cover only IR35 disputes (which is a later stage) and not an IR35 enquiry. Tim should confirm whether his insurance covers an IR35 enquiry, before contacting the insurance company.
If the HMRC is not convinced with Tim’s response, it will request a meeting. Typically such a meeting is attended by two compliance officers who try to understand the contractor’s working practices. It should be noted that if Tim is not comfortable, he has the right to refuse such a meeting. He can ask the enquiry to be completed through correspondence.
After the meeting, HMRC will analyse all the evidence submitted by Tim. If they are convinced that Tim is outside IR35, they will end the enquiry.
If HMRC are not convinced by the evidence, they will conduct a detailed review of Tim’s situation. As a first step, HMRC will connect with Tim’s end clients to verify all the evidence provided by Tim. Things get a little difficult and risky from hereon for Tim, because he has no control over the communication between HMRC and the end client. HMRC will send a long questionnaire to the end client, which will include questions about Tim’s working conditions. If the end client is a large organisation, it can be risky for Tim if the questionnaire goes to the HR or legal department. While some members of the HR or legal departments may be aware of IR35, they may have no idea of Tim’s actual working conditions.
From this stage, there will be a lot of back and forth between Tim and the HRMC. Usually, this period takes very long, and some cases have lasted even for 5 years. Based on feedback from contractors, HMRC has now committed to close IR35 cases quickly.
This is the last stage of the enquiry. In this stage, HMRC will conclude whether any of Tim’s contracts falls inside IR35. If the HMRC catches any contract as inside IR35, Tim can appeal against HMRC’s decision. If needed, the appeal can even go to the tax tribunals. However, an appeal to the tribunal involves extra costs and should be considered only if there’s no other option.
Before appealing to the tribunal, Tim can ask for an independent review of HMRC’s decision. Tim can also seek help from HMRC’s Alternative Dispute Resolution (ADR) service where an inspector, who did not work on the original enquiry, will independently hear the case.
If, after all these appeals, it is concluded that Tim’s contracts are inside IR35, then he will be expected to pay the necessary taxes, National Insurance, and even penalties.
An IR35 enquiry can be a very stressful experience for contractors. If they can convince the HMRC in the initial stages that they are outside IR35, contractors can avoid a lot of trouble. As mentioned above, it is recommended to get expert advice if there’s an IR35 enquiry.
We provides a full range of accounting services to Limited Company contractors, including dealing with IR35 enquiries. You can get professional advice on how to deal with the case in the most tax-efficient manner.