As of 6th April 2021, all responsibility for determining IR35 status moved from contractors to the end clients and agencies that engage them. Despite this, a level of risk still remains.
Not only is there the small companies exemption that may leave the contractor with the IR35 liability, but there is also the all too real threat of retrospective investigation to contend with. Under normal circumstances HMRC can go back 4 years, which means the period prior to 6th April 2021 is still very much open for them to investigate. At Qdos, we are still regularly picking up new enquiries on behalf of contractors into that historic period.
Contractors shouldn’t be lulled into a false sense of security by the change in rules that reform presented. With that in mind, here is an overview of the enquiry process including guidance on how best to proceed if you are unlucky enough to find yourself under investigation.
An enquiry will almost always open with a letter from HMRC, so it’s always important to be alert to any correspondence you receive. Typically, an opening letter refers to a check of employer records. Sometimes HMRC use a routine process in order to get their foot through the door. They then to move on to questions related to IR35 status. In other instances, the opening letter is more direct which may be down to some other form of intelligence received.
HMRC’s motive of looking into IR35 is nonetheless usually fairly clear from the content of the letter.
It’s likely that the opening letter will also contain some questions and requests for information. HMRC like to get a hold of things like contracts, schedules, and invoices from an early stage. They are also likely to want a high level description of how you work and what you do.
At this stage, our advice to contractors is that you seek the assistance of a professional. A response drafted in the wrong way or containing the wrong details may be used against you further down the line.
Those contractors that have relevant insurance policies in place should at this stage report to their insurance provider. For those contractors who do not have adequate insurance in place, it’s time to try and find a company with practical experience in dealing with status cases, as soon as possible.
The assistance of your insurance provider or an experienced professional will be vital when it comes to submitting an initial response.
Once the initial response is submitted, HMRC will then come back with more questions. However, it could be several weeks between letters. An enquiry can take months or years to run its course.
When you do get HMRC’s response, it’s likely that they will want a lot more information. It’s common at this stage for them to send a very long and detailed list of questions for you to answer, covering every aspect of how you run your company and how your services are provided.
Ensure this is approached with a huge amount of care. A large part of IR35 is about terminology and semantics, questions asked are likely to be leading. Again, this type of questioning is best handled by an expert who knows how the facts should be presented.
Either in this letter, or in subsequent correspondence, HMRC may well request a face to face meeting with you. You are under no obligation to do this and we suggest that all questions are better dealt with in writing, this way you can be sure that you are responding clearly and accurately.
Once all information requested by HMRC has been provided, if it is still not accepted at this stage that you are outside IR35, it’s likely that HMRC will want to speak to your client for the applicable engagement.
This can be considered a dangerous time for any IR35 investigation. The risk here is that HMRC end up speaking to someone who does not understand IR35 or does not have any direct experience of how contractors work.
The possibility of this should be prepared for. The professional in charge of your case should get in touch with the client ahead of any contact from HMRC, ensuring that any responses are coordinated and reflective of the actual facts.
After some potentially lengthy back and forth, HMRC will state their final position.
If they agree that you are outside IR35 then you can consider it a job well done.
If they reiterate that you are, or were, operating inside IR35, then HMRC will raise what is called an assessment. An assessment will detail the tax and national insurance they believe is due.
This can amount to a significant sum. If you no longer wish to take the case any further, you can accept HMRC’s decision and try to negotiate a settlement amount at this point. On the other hand, you have 30 days to appeal the decision. This will take the case out of HMRC’s hands and to an independent tax tribunal.
Qdos have seen a lot of cases follow this route over the last few years. Taking a case to independent tax tribunal means that an impartial judge will review the entire case and decide whether HMRC have made the right decision about your status. To do this they will dig out decades worth of case law and compare the facts of your case against precedents that have been set in the past.
It may come as no big surprise that this is another lengthy process. There will be a long wait for your case to be heard, followed up by another wait for the judgement to be delivered. It can often be several years between the opening letter and a tribunal result.
In a lot of recent cases the tax tribunal judge has rejected HMRC’s position and agreed that the contractor is genuinely outside IR35. However, given the complexities and long history of status, it’s always a bit of an unknown factor.
If the judge agrees with HMRC, however, there are several more stages of appeal. At this point the legal costs for representation will also become a consideration.
With the help of expert representation from the start, most cases are closed down long before you get to tribunal. HMRC often choose to pick their battles.
Our advice to contractors is to be prepared. Even if the chances of an investigation are relatively low, it’s a good idea to have insurance or representation lined up and to collate as much evidence as you can to reinforce your position.
Ask away! One of our team will get back to you!