Essential guide to IR35 investigations for contractors

IR35 enquiries will seek to determine whether your employment status for your contracts as outside IR35 is correct. Responsibility for determining your status as inside or outside IR35 now lies with the end-client under the new legislation, unless they’re eligible for the small company exemption in which it case it remains your company’s responsibility and liability.

HMRC has never publicised its approach to selecting enquiries, but there has been a thread running through many. End client engagers have tended to be large businesses – including public sector bodies, often in banking and finance, oil and gas, and more recently the media – which in recent years may have been prompted by the intermediaries reporting, which agencies have to undertake every quarter.

What is also attractive to HMRC is where the contractor is paying themselves a low salary and taking the largest portion of their remuneration in dividends, because this is where the savings in National Insurance Contribution arise and where the largest source of uncollected tax may lie.

HMRC are also clamping down on contractor tax avoidance schemes that have cropped up in recent years, which, of course, you should not take part in.

During an IR35 investigation, HMRC assess whether your employment status is correct. There are three main factors used to determine employment status and whether your contract is for services or employment. HMRC will typically review your contracts and put your working practices under a microscope to establish whether your work falls inside IR35 legislation.

• Control
  As an independent contractor, you should have control over how you do your work. If your contract demonstrates that you will be supervised or can be moved from task-to-task, this may indicate your engagement is inside IR35.
• Mutuality of obligation
  This covers whether there is a commitment to offer and accept work, as it would be if you were an employee turning up for your shifts every week. Your contracts should make it clear that you’re working on a project basis.
• Personal service
  You should be able to show that your personal service is not a requirement of the engagement, or in other words, you can send a substitute to carry out the work.

In all cases, these contractual rights should be supported by your working arrangements.

HMRC have advised that they’re focussing on making sure that businesses comply with the new IR35 reforms, rather than looking at historic cases (unless they suspect deliberate avoidance of employment taxes or fraud). That said, HMRC are still starting IR35 enquiries and seeking to collect unpaid employment taxes from earlier years.

If you’re in doubt, you should have your current contracts reviewed by an expert to have an independent opinion on your IR35 status. Remember, your status can vary between contracts. If you believe your client has made the wrong decision about your employment status, there is an appeal process that you can follow.

If HMRC conclude that your employment records are accurate, then nothing further happens. But, if HMRC determine that your contract is in fact inside IR35, then you’ll have to pay any tax and National Insurance owed. You may also need to pay interest and a penalty. Penalties are based on taxpayer behaviour and penalties can vary, so HMRC will inform you of this amount if necessary.

You do have the right to appeal the decision, but remember that costs can quickly snowball, so it’s best to seek professional advice before taking any further action. After all, you also have to weigh up the time and energy spent away from your business.

Keeping accurate and organised records, submitting your tax returns on time and explaining any changes before the question is asked are just a few ways you can give yourself the best defences.

In addition to following the right procedures, having tax investigation insurance in place can save you precious time and money. Even if you win, the cost of defending yourself in an IR35 enquiry can sometimes skyrocket into the thousands.

“Some tax protection policies, like FSB’s, will even include representation from a former tax inspector, which is invaluable experience to have on your side when dealing with the complexities of IR35 and HMRC,” says Jacqui Mann.