How will you hold up in an IR35 investigation?

Surviving an IR35 enquiry

An IR35 investigation can be an incredibly stressful time, just ask anyone who has been through one. Due to the uncertainty and opinion-based nature of the legislation, even the surest of compliant contractors will begin to doubt themselves when HMRC start investigating.

What you can do before an investigation

Prevention is always the best form of defence. Take the necessary steps to ensure you are being compliant and be prepared for a potential investigation by:

• Having your written contract independently reviewed for compliance
  
  
• Reviewing your working practices, ensuring to record your checks if you are not using a professional to do it for you and that your end client agrees with you
  
  
• Ensuring everything in your written contract is true in real life, even down to the smallest detail (HMRC may question the integrity of your entire contract if even one small thing is untrue)
  
  
• Obtaining written confirmation of your working practices from your end client where possible
  
  
• Keeping an organised file of all records related to your status compliance such as copies of contracts and contract extensions, compliance reviews for both written contract and working practices, correspondence with your end client e.g. emails with your own company logo or an employee list that was sent around which didn’t have your name on it etc., receipts for marketing investment and so on
  
  
• Paying a deemed salary if you find yourself working ‘inside’ the legislation (speak with your accountant if you think this may apply)

Remember that you need to check your compliance with every contract and if anything changes during your contract as well. Independent reviews are important and inexpensive (Qdos offer free basic reviews with their business insurance), as in the event of you being charged after an investigation, your penalties will be reduced or levied entirely if you can show you took ‘reasonable steps to ascertain your status.’

It is also advisable to take out some IR35 defence insurance which gains you an expert to fight your corner for you. This professional representation could be the difference to winning or losing your case. Qdos offer this insurance or you can opt to have further insurance which will cover your liabilities, penalties and interest should you be charged with them (limits apply). This same representation can be costly if you wait to be investigated.

What you can do during an investigation

No matter how prepared you are and how much time you put in to ensuring your compliance with the IR35 legislation, anyone can be investigated. HMRC will first send you a letter requesting contracts relating to a specified accounting period and evidence to support your believed IR35 status. If you have taken out some defence insurance, you should immediately contact your insurance provider prior to responding to HMRC (Qdos deals with cases from the first letter so you do not need to deal with HMRC at all). Otherwise, here are some helpful tips for dealing with HMRC in an enquiry and investigation:

• Inform your accountant.
  
  
• Be helpful. Provide all requested documentation in a timely manner (this is where your organised file will come in handy).
  
  
• Avoid using any employment-related terms. For example, replace ‘overtime’ with ‘additional hours’ and ‘CV’ with ‘business profile’.
  
  
• Politely refuse face-to-face meetings with HMRC. Although HMRC may request one, you are not obliged to it and these meetings are often detrimental for the contractor as they do not provide time to consider the questions carefully before answering.
  
  
• Insist on evaluating any third-party information (HMRC will often seek information from your end client or agency) and challenge anything which is incorrect or inaccurate as well as if it has come from a member of the company who you do not deal with regularly.

An investigation will either close after HMRC have had sufficient evidence from you proving your status, or it may lead to a Tribunal hearing (you will have the opportunity to appeal HMRC’s decision prior to a hearing) if they decide that IR35 applies.

There is a wealth of free information and guidance on IR35 available at our IR35 Advice Centre, including example cases and enquiry letters, so ensure you have an understanding of the legislation and take advantage of our competitive policies and invaluable review services to ensure a happy future in contracting.