IR35 Investigation Process

What is the IR35 investigation process, what triggers them and how to handle one. We explain everything you need to know about IR35 investigations.

IR35 Investigations

Despite best efforts to maintain compliance with the IR35 legislation, HMRC may still open an investigation into your accounts.

It will usually begin with a request for information relating to a specified accounting period and require evidence as to your IR35 status. From here investigations range from a matter of weeks with no further information required - to years of back and forth and in some instances an appearance at a Tax Tribunal.

Having successfully defended in excess of 1,600 HMRC investigations, and saved contractors over £35m in tax, we know the investigation process, HMRC terminology, and tactics well and are able to confidently defend contractors against HMRC. Our Head of Tax is a former HMRC Inspector of Taxes himself, providing Qdos with the first-hand experience needed to handle IR35 investigations. As one of the few true IR35 experts, we have been involved with the IR35 legislation since it began, following every amendment and relevant case.

Below you will find information about IR35 investigations, the process involved, real-life experiences as well as how to handle an investigation should you receive such a letter.

IR35 investigations can be time-consuming and costly, as well as stressful, therefore it is worthwhile having an independent specialist to handle this on your behalf. Qdos have a dedicated team of IR35 status experts that can not only help with contract reviews and IR35 queries but are also able to represent you in IR35 investigations.

We are able to represent you whether you are insured or not. Uninsured clients often do not know where to turn, but we are happy to assess your situation and the case for you. We are also happy to take on a case after it has already started, to reach a settlement preferable to you. We have picked up HMRC cases that are already well into the investigation process and have saved clients a lot of money in doing so.

Please contact our consultancy team on 0116 269 0992 or [email protected] for more information

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Investigations after April 2021

Since the implementation of the off-payroll working rules, one of the main changes to how an enquiry is initiated is that rather than the contractor being approached, HMRC begins proceedings with the end client for that engagement.

This is unless you are contracted with a small company, in which case you remain the primary target for enquiries.

The initial letter asks for more information from end clients after the reform than it ever asked from contractors before.

For example, it asks the end client how many contractors they engage and how many of these contractors fall inside or outside of IR35. In addition to this, HMRC asks the end client to identify those contracts that are outside of IR35.

From the addition of these questions, there are concerns that we may go on to see an increase in blanket IR35 enquiries like those that we have seen from HMRC in the public sector.

What are the consequences if you're caught by IR35?

It is important to first note the difference between engaging in contracts that are initially determined to be inside IR35, and engaging in contracts that are assumed to be outside but then following an enquiry by HMRC are found to be inside.

If you provide services for an engagement that is initially considered inside IR35, there will be no ‘consequences’ so to speak, other than that you will have a higher rate of tax and National Insurance deducted at source by the fee-payer in any engagements with public sector bodies and medium or large businesses, or need to make a deemed payment at the end of the year for the same if engaged with a small client in the private sector.

If, on the other hand, you are providing services to a medium-large end client and found to be inside IR35 through an enquiry by HMRC, liability for this will generally sit with the fee-payer in the engagement if everyone has met their obligations. Meaning the fee-payer will be responsible for repaying any overdue tax and National Insurance as well as any interest or penalties that may have built up.

It should be noted that contractors providing services for 'small' end clients will remain responsible for their IR35 status, as well as for any services provided in the private sector prior to 6th April 2021..

Something you should keep in mind is that an enquiry from HMRC should not be taken lightly, not only is it stressful, but the proceedings can continue for an extended amount of time. When you consider the costs of defending yourself against an enquiry from HMRC, it is easy to see how quickly that number could rise. Because of this, it is increasingly important that contractors have adequate IR35 insurance in place to protect their businesses. For more information on our IR35 offering for contractors, see here.

IR35 Investigation Process

An IR35 enquiry will begin with a letter from HMRC. In the past, these letters have often been dressed up as an employer compliance review about payroll, or perhaps as a request to confirm or clarify a fact on a contractor’s tax paperwork, but now these letters are often more direct.

Below is an extract from a typical first letter to the contractor (visit the IR35 Resources section for a full example letter):

"Will you please tell me whether you have considered the possibility of the company being subject to what is commonly referred to as the IR35 legislation? If you have and have concluded that the company is not subject to that legislation then please explain to me the basis upon which you arrived at that conclusion. I am asking this to help me be fully aware of and understand any view you may hold on the application of the IR35 legislation."

HMRC are able to request information relating to a contractor’s past, present, and future using ‘Schedule 36 Powers’. It is therefore likely that a letter will also request documentation such as copies of contracts to use as evidence.

It is not advisable for a contractor to handle an investigation without the guidance of a specialist; even the most IR35 savvy of contractors are not prepared for HMRC’s tactics and are often unaware of the powers HMRC hold. The way the investigation is handled from the start is crucial, as a satisfactory response to the initial letter can close down an enquiry right away. Read a real life example here.

The IR35 specialist will work with the contractor to collate evidence of their IR35 status to present to HMRC. These will often include any contracts relevant to the enquiry period, ideally the contractor will have already had a contract review but if not, this can be done by the IR35 advisor along with a review of the working practices. Having a Confirmation of Arrangements (COA) letter signed by both the contractor and the end client to confirm the working relationship is also a great piece of evidence to have.

Contractors representing themselves can be faced with a prolonged investigation and at times end up with a significantly higher tax and NI bill, than if they were in receipt of professional representation. An IR35 expert will look to ease the burden on you, correspond with HMRC on your behalf and try and cut short an IR35 review from the outset.

Contractors who have an IR35 Insurance policy should contact their provider before taking any action. This is usually a requirement of the insurer and failure to do so could result in the policy being invalid. The insurer will then appoint an IR35 specialist to fight the case from the start. If you do not hold an appropriate policy, you can still seek the help of a specialist but will most likely have to pay hourly consultancy fees which can soon mount up.

HMRC will want to talk to the end client should they find that in their view, the evidence the contractor has provided to be insufficient.

It is certainly advisable for the contractor and the specialist to meet with the end client(s) to get them onside before this happens. This is essential, as a contractor’s defence may stand or fall on the client’s evidence.

HMRC’s contact with the end client usually starts via written correspondence. Unfortunately, it is often the case that this falls into the wrong hands such as human resources departments who may have little idea of the nature of the contractor’s relationship with the project manager, making a meeting all that more important to ensure the appropriate person deals with any such correspondence.

HMRC will often request to meet with the end client, who does have the right to refuse such a meeting but may be unaware that this is the case, so the typical reaction is to agree to a meeting. It is also extremely important that when providing HMRC with contact details at the end client that the details given are those for someone who is fully aware of your day-to-day working practices.

The reason for the IR35 specialist and contractor to meet with the end client is not to tamper with evidence in any way, but to ensure that the client understands how to deal with questions and requests from HMRC.

Once all avenues have been exhausted, the time will come for a decision on the contractor’s status to be made.

The contractor will either be found to be inside or outside of IR35.

If found to be outside of the legislation, the enquiry will close in the contractor’s favour.

If the contractor is found to be inside IR35, the inspector will raise an assessment for the tax and NICs HMRC believe are owed by the contractor’s limited company under the IR35 rules.

HMRC will issue two assessments for the enquiry period:

  • Unpaid Pay As You Earn (PAYE) Income tax determined under regulation 80
  • Unpaid NICs determined under Section 8

There is the potential for a penalty to be added should the inspector decide that the avoidance of paying the correct tax was due to behaviour that was careless or deliberate on the contractor's part.

At this stage, a contractor’s advisor would appeal against both of these assessments and request that all additional liabilities be postponed until the investigation is settled.

The contractor has 30 days to appeal to the decision and request that the case be taken before the first tier tax tribunal. It can take months for this to happen and the enquiry is not on hold during this time.

During this period, the contractor has the option of HMRC’s Alternative Dispute Resolution (ADR) process, which has proven to be very effective in some cases. This process sees both HMRC and the contractor and their adviser present their case in person to a facilitator- another HMRC inspector who has had no involvement in the case until this point, in the hope of reaching an agreeable outcome thereby avoiding the need to go to a tax tribunal.

It is worth the contractor trying this route as it has no negative impact on the case and can result in a positive outcome for the contractor in a reasonably fast amount of time, with an average turnaround of 45-90 days depending on the complexity of the case. This process can settle a case without the need to go to a future tribunal, which may have been scheduled.

In the event of an unsuccessful ADR and no further evidence coming to light, the case will be heard before the first tier tax tribunal. The process at this stage is relatively straightforward.

Both HMRC and the contractor’s advisor will prepare evidence to present to the tribunal judge. HMRC’s representative (usually an inspector specialising in appeal hearings) and the contractor’s advisor make their case to the judge.

Either can introduce witnesses to provide and support evidence, whom the judge can question.

It can be months before the judge issues a ruling based on the evidence presented during the tribunal. Both the contractor and HMRC can appeal this decision which will take the case to the upper tax tribunal where the process is repeated, often accompanied by additional evidence or witnesses.

In extreme cases, the case may proceed to a higher court.

If the contractor is found to be outside IR35 and HMRC do not appeal, the investigation is over and the regulation 80 and section 8 assessments are reduced to zero, however it is rare for costs to be awarded.

If the contractor is found to be inside IR35, their limited company will have to pay any unpaid income tax, NICs, interest, and potential penalties. This can be financially crippling for a limited company and it is too late at this stage to try and agree a settlement with HMRC.

The calculation of the final assessment is based on the ‘deemed payment’ the contractor would have earned during the contracts caught by IR35, minus a corporation tax deduction for the period in question.

What triggers an IR35 investigation?

HMRC keep their cards very close to their chest when it comes to exactly what could trigger an IR35 investigation. They have, however, stated that those receiving IR35 enquiries have been chosen entirely at random.

The potential triggers for an IR35 enquiry are acknowledged as being one of two things, either direct or indirect.

Indirect: Due to the outcome of another investigation into your business, for example, an investigation into VAT, you have caught HMRC’s eye. Because of this, they may choose to investigate your business further to determine IR35 status and check you are operating compliantly.

Direct: A direct trigger for an IR35 enquiry would be as simple as whether you meet HMRC’s ‘criteria’ for warranting an IR35 enquiry, which could be something as straight forward as low salary and high dividends.

What exactly are these ‘criteria’?

Again, this is something that HMRC has never divulged and it is doubtful that we will ever find out exactly what, if any, are the criteria that trigger an IR35 enquiry. Because of this, it is important to ensure that you are operating as compliantly as possible when it comes to your business. Whether this means having your engagements regularly assessed for their IR35 status, or following HMRC’s guidance to the letter, in general, it is best to avoid any tell-tale signs of non-compliance wherever possible.



How far back can HMRC investigate?

HMRC have a three-tier system for determining how far they can look back into your engagements.

  • 4 years- HMRC can extend an enquiry as far back as 4 years for simple innocent error and honest mistakes.
  • 6 years- HMRC can investigate 6 years back into your engagements should they notice any ‘carelessness’.
  • 20 years- Finally, HMRC may go back up to 20 years in the event that they can pinpoint any fraudulent activity or deliberate tax avoidance.


In the Compliance Handbook [CH54300] it states that “the onus of proof of careless or deliberate behaviour is on HMRC”. More information on penalties and so what may constitute 'careless' or 'deliberate' behaviour can be found in the Compliance Handbook [CH81110].

How to handle an IR35 investigation

  1. Seek an expert from the outset
  2. Some contractors believe they can deal with an enquiry themselves or with their accountant’s help. When things start to get difficult however, the contractor and their agent invariably turn to specialists like Qdos for assistance by which time some damage may have already been done and the specialist adviser is faced with a degree of ‘firefighting’.

    Whilst there have been some examples of contractors successfully defending their own cases, it is important to get an IR35 expert on side early on who not only understands IR35 but also HMRC's processes and tactics.

    Enquiries can rumble on for some time, years even, and professional fees can become expensive, even more so if an appeal ends up at tribunal. With an insurance policy in place - contractors can ensure expert defence from the outset without forking out for consultancy fees.

  3. Be prepared
  4. If a contractor cannot produce evidence that discharges their obligation to consider IR35, this leaves the door ajar for HMRC to consider penalties should the contract fall inside of IR35. The length of an enquiry can be shortened if a contractor has maintained and retained a dossier relating to their working practices, particularly surrounding the areas of control.

  5. Communicate in writing
  6. It is preferable to liaise with HMRC in writing. This not only ensures a clear trail of communications but also that you can carefully consider any responses to HMRC's questions. It is very easy for HMRC to trip you up in a face-to-face meeting with loaded questions and semantics.

    Where a contractor has agreed to a meeting with HMRC, we would always undertake a mock meeting with the client prior to the actual meeting itself. This prepares the contractor for the type of questions that they will be asked and to coach them in their responses, such as their terminology.

  7. Ensure the end client is on your side
  8. In most cases, end clients will not agree to the contractor or their agent being present at any meeting between themselves and HMRC. In these cases, every effort should be made to ensure that HMRC provide the contractor and their representative with an agenda and list of questions to be asked at that meeting.

    The agent can then, with the assistance of the contractor, offer to provide the end client with assistance in answering such questions, again in the use of terminology and presenting the facts in the best light. On too many occasions, unwitting end client representatives say the wrong things and allow themselves to be ensnared by HMRC’s leading questions.

  9. Know your rights
  10. Do not be scared to enforce them at all times, nor allow HMRC to overstep the legislative boundaries, and do not be afraid to complain about an officer’s behaviour/actions if it is detrimental to the course of the enquiry.

    Inspectors are supposed to be impartial, objective and only interested in ensuring that the correct amount of tax is collected, yet attitudes amongst them vary. These type of Inspectors refuse to listen to reason and interpret the facts to suit their own ends and consequently make it very difficult for the enquiry to be resolved expeditiously.




How many contractors are caught by IR35?

Between 2010-11, there were a reported 6,000 contractors identifying themselves as PSCs and paying taxes as inside IR35. HMRC however believes that this only equates to 10% of those who should be paying tax as inside IR35.

There have been 35 IR35 investigations which have gone all the way to tribunal from 2000 to 2020 - 15 of which were won in favour of HMRC, and 2 of which were split decisions. The total number of enquiries however which have not made it to tribunal is undisclosed, although considered to be in the thousands, as well as how many were found to be inside IR35.

While it is difficult to determine exactly how many contractors are classed as inside IR35, we can say that 91% of individual assessments undertaken here at Qdos via our Status Review platform are outside of IR35 (2017-2020).

Despite this, IR35 is very complicated, and undertaking assessments can feel like a daunting prospect for contractors, with HMRC often found to be treating cases as guilty until proven innocent.

By undertaking IR35 assessments, you can understand the true nature of your engagement and restructure accordingly in order to remain compliant.

Why Qdos?
Self-employment is our everything. In fact, we’ve been specialists in the industry since 1988.

We’re business insurance and employment status enthusiasts. We get a kick out of simplifying the complex world of compliance so you don’t have to.
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