There is a large amount of information available regarding IR35 and how to protect yourself from it but what happens if you are actually selected for an investigation?
The initial HMRC letter
The majority of IR35 investigations begin with a letter from HMRC titled ‘Check of employer records’. In this letter HMRC will state that they have selected your company for a ‘check’ but will make no mention of IR35 until later in the letter where they will ask whether you have considered IR35 and, if so, why you concluded that you are operating outside of the legislation.
It is vital that in your response you provide them with strong and accurate evidence that proves you are not caught by IR35. If a detailed and satisfactory response is given at this stage HMRC may accept that without further question. It is more likely, however, that they will want to look further into the contractors IR35 position.
If HMRC do not accept the evidence presented in the initial response they will want to carry out an in depth review of your situation. This includes analysing written contracts, working practices and engaging with your end user to find out the ‘true facts’.
One of the first things HMRC will want to do is meet the contractor, this is commonly with two compliance officers and they will ask questions regarding the contractors working and business practices.
If they are still not satisfied they will contact your end client. This includes a lengthy questionnaire asking questions about how the contractor works and is treated. This can be dangerous as there is a risk the person completing the questionnaire will have little knowledge of this information so all correspondence should be checked before returning to HMRC.
IR35 enquires can be lengthy processes, with some cases in the past lasting several years. However, as part of HMRC’s revised approach to IR35 new enquires are proving to be much quicker.
Once HMRC have spoken to all parties and considered all of the evidence they will make a final decision on the contractor’s status. If they decide you are operating outside of IR35 then that’s the end and the contractor can carry on as usual. If you are decided to be inside IR35 they will make a demand for a retrospective payment of PAYE tax and NI plus interest and possible penalties.
When dealing with an investigation it is highly advised to use the services of an IR35 specialist. TI Accountancy offer ‘Tax Investigation Insurance’ which covers you for the costs of any investigation up to £75,000.
For more information please email us at email@example.com or call us on 01229 813388.