Information

How to protect against an IR35 tax investigation

Avatar
Written by Caunce O'Hara
Last updated February 1, 2021

If you receive a letter from HMRC regarding an IR35 tax enquiry it is important that you immediately seek advice from an IR35 expert. If you have a Tax Enquiry & Legal Expenses insurance policy, then it is vital that you contact your insurance provider and make your claim straightaway.

 

Before we look at how you can protect yourself from an IR35 enquiry, let’s take a brief look at the HMRC investigation process itself.

Why seeking professional advice is key.

An IR35 enquiry is not something you should attempt navigate on your own. The legislation is complex, the legal arguments are based around case law, rather than any clear legislation, and you will be up against trained HMRC case officers who will be happy to interpret the facts to suit their own arguments.

Engaging an IR35 expert for their professional advice from the outset will give your case the best possible chance of success and help set out your stall should you receive a ‘Check of Employer Records’ letter from HMRC.

The ‘Check of Employer Records’ letter provides you with the opportunity to set out your position and why you believe your engagement is outside AIR35. However, it also hints that HMRC want to be able to establish whether you can demonstrate that you have undertaken a level of due diligence to satisfy their requirement for taking reasonable care in your IR35 decision-making.

This is when the expertise of an IR35 specialist is needed as they will want to review the contract(s) and highlight the positives and question you about the actual working practices of the engagement, with a view to demonstrating that the working practices support the contractual terms.

When this change in enquiry approach was introduced, our colleagues at Markel Tax found that a detailed response to this letter had a one in three chance of closing the enquiry.

However, it appears that HMRC case officers have reverted to rarely accepting the response but will usually respond themselves with a working practices questionnaire that may contain over 100 questions and they will certainly want to approach the end-client for their view.

The danger with this situation is that someone responding from within the end-client organisation may have little knowledge of IR35 and the engagement you were working on.

If HMRC do not accept the initial response, it can be the start of multiple correspondence being exchanged whilst HMRC will be requesting a meeting with you the contractor. There is no obligation for any taxpayer to meet with HMRC and rarely would there be any value to putting you into the high-pressure environment and so meetings are routinely refused.

What if the matter cannot be resolved by correspondence?

If the matter cannot be resolved by correspondence and has reached an impasse, then the next stage may be to take advantage of HMRC’s ‘Alternative Dispute Resolution’ (ADR) service which allows the case to be discussed face-to-face with an independent HMRC facilitator who was not involved in the original enquiry.

ADR can be used before and after HMRC has issued a decision that can be appealed and at any stage of an enquiry, including:

  • during a compliance check when you are unable to reach an agreement with HMRC, or where progress in the enquiry has stalled.
  • at the end of a compliance check, when a decision has been made that you can appeal against.

Alternative dispute resolution does not affect your right to appeal, or to ask for a statutory review.

As you can see, the process would extremely complicated, time-consuming, and stressful without the assistance of an IR35 expert.

For more in-depth information about the process read our article What to expect from a HMRC IR35 investigation.

 

How can you protect yourself from an IR35 investigation?

There are more options to protect yourself from the negative effects of IR35 than you may think.

1. Tax Enquiry and Legal Expenses insurance

Caunce O’Hara’s our Tax Enquiry and Legal Expenses insurance policy ensures that you are appointed with an IR35 specialist consultant to take you from the opening ‘Check of Employer Records’ Letter through to Tax Tribunal if necessary.

The policy provides you with £100,000 of cover (in any one claim) for legal representation costs incurred in the event of HMRC investigation or other dispute, including:

  • Employment disputes
  • Employment compensation awards
  • Property and landlord and tenant disputes
  • Criminal defence
  • Tax protection
  • Regulatory compliance
  • Court attendance costs, including jury service.
  • Employment extra protection
  • Identity theft
  • Contract disputes.

The policy also offers a free legal helpline.

The policy is only £75.00 per annum, which we think is a small price to pay for so much value.

Click here to purchase your Tax Enquiry & Legal Expenses insurance today.

 

2. Contract review

The IR35 contract review will look at both the specific contract signed by the contractor and the working practices of the contract. The contract review will be undertaken by an expert IR35 contract reviewer whose procedures have been approved by our taxation partners at Markel.

The contract review must pass the contract/engagement as being outside IR35 and not ‘caught’ by the IR35 Intermediaries Legislation.

The contract review is available for the special discounted price of only £60.00 when purchased with the Tax Enquiry & Legal Expenses insurance policy.

Click here to purchase your contract review today.

 

3. Tax losses insurance

Based on the result of the IR35 contract review determining the contractor to be outside IR35, this policy will cover the net tax loss which arises when HMRC successfully argue that an insured’s qualifying contracts falls inside IR35. The contract review must pass the contract/engagement as being outside IR35 before the Tax Losses insurance policy will be made available to purchase.

Please click here for information about Tax Losses insurance

 

4. How you can protect yourself if you are being engaged by a small company.

HMRC have determined that small companies are exempt from making IR35 status decisions which removes approximately 1.5 million companies from the requirements of the Off Payroll Working legislation.

Small companies must meet at least two of the following criteria:

  • Turnover of no more than £10.2 million
  • Balance sheet total of no more than £5.1 million
  • No more than 50 employees

Whilst small companies engage only a small proportion of the contractor population, their exemption from decision making means that the contractor retains the responsibility for determining the IR35 status of the engagement (and the liability for getting it wrong) after April 5th.

If you are engaged by small company, your personal service company (PSC) will be continued to pay gross and you determine how you will be remunerated. It will be your responsibility to demonstrate due diligence and that your outside IR35 decision is based on an a proper assessment of the contractual terms and working practices, so it would be appropriate to have the engagement   with an IR35 contract review and even consider purchasing the tax losses insurance policy, which will cover net tax loss that arises when HMRC successfully argue that an insured’s qualifying contract falls inside IR35.

 

Caunce O’Hara offer a range of business insurance solutions to help contractors stay protected including Tax Enquiry & Legal Expenses Insurance, which provides cover for costs incurred by a HMRC investigation. Tel 0333 321 1403.

Markel Tax offer expert IR35 tax services and can help your business ensure it is compliant with the legislation. To speak to one of their experts please contact 0333 920 5708.

 


Avatar
Written by Caunce O'Hara
Last updated February 1, 2021

Related IR35 content

IR35 and Umbrella companies – how does contracting through an Umbrella company make a difference?

When the off payroll working rules were introduced into the public sector in April 2017, it quickly became clear to…

Read more

What is my IR35 status?

As a private sector contractor operating through a Personal Service Company (PSC), you can’t afford to wait until April 2021…

Read more

Factors that determine IR35 status

IR35 v self-employment Just to clarify a key point before we begin, a contractor does not have to be engaged…

Read more

New IR35 Rules explained

After being delayed for a year due to the Coronavirus pandemic, the new private sector off-payroll working legislation (IR35) will…

Read more

How to protect against an IR35 tax investigation

If you receive a letter from HMRC regarding an IR35 tax enquiry it is important that you immediately seek advice…

Read more

What is IR35 and who does it apply to?

A useful starting point is to explore the background to the off-payroll working legislation (IR35), because the changes that came…

Read more

Can contractors working on contracts inside IR35 still work through a limited company?

The off payroll working rules, known as IR35, will finally be rolled-out into the private sector on April 6th, 2021….

Read more

Why end-client businesses should make their IR35 decisions now

IR35 decisions can be made now End-client businesses which engage contractors (whether directly or indirectly via agencies) must determine whether…

Read more

Fee payers: Your IR35 responsibilities and your liability

The fee payer is the party paying the contractor’s PSC; i.e. the entity directly above the contractor’s limited company in…

Read more

What to expect from a HMRC IR35 investigation

If you receive a letter from HMRC regarding an IR35 enquiry it is important that you seek advice from an…

Read more

Frequently asked questions about the IR35 in 2021

We have collated some of the most common questions asked about the IR35 changes, relevant to each area of the…

Read more

IR35 Where are we now and what does the future hold?

After the government’s postponement of the IR35 changes, the off-payroll legislation in the private sector reforms are now imminent. The…

Read more

Who pays the Piper? The Relevant Person and IR35 Debt Transfers

One of the most confusing issues with the new rules for IR35 which will come into force next April are…

Read more

6 Questions you need to ask yourself about IR35

The fundamentals of IR35 are NOT changing: understanding the key status indicators – personal service, control, and mutuality of obligations – is…

Read more

The impact on contractors of the deferral of private sector IR35 reform until April 2021

Since Steve Barclay, the Chief Secretary to the Treasury announced a 12-month delay to the IR35 private sector reform in…

Read more

Retain your control as a contractor to keep IR35 at bay

Control is one of the three key points that is used to determine whether a contractor is working inside IR35…

Read more

Why do I need an IR35 contract review?

If you are a contractor with any doubts as to the compliance and validity of your contract in relation to…

Read more

How does HMRC define a PSC?

What is a Personal Service Company? Found across all industries, a Personal Service Company (PSC) is a company which provides personal services…

Read more

What is IR35 and how does it work?

IR35 – or the Intermediaries Legislation – was introduced by HMRC in 2000, and was aimed at individuals who were…

Read more

What is a contract review and do I need one?

A Contact Review is a report that independent tax specialists such as Markel Tax provide to contractors giving an opinion…

Read more

IR35 changes 2021: What you need to know

The Government has reaffirmed plans to make changes to off-payroll working (IR35) rules effective from April 2021. The main principles…

Read more

What is inside and outside IR35

There is no statutory definition of a contract of service (employment contract) and therefore we must look to the courts…

Read more

Will contractors still need insurance for IR35 after April 6th?

Amendment: On March the 18th 2020, the Government announced that the roll-out of private sector IR35 reform would be postponed…

Read more

What is IR35 and how will it affect you as a freelance contractor?

For many freelancers, IR35 sounds like another jargon term that has no relevance to them and there is a concerning…

Read more

The Right of Substitution

The right of substitution is one of the key tests of your IR35 employment status as set out by the…

Read more

Mutuality of Obligation (MOO)

Mutuality of Obligation refers to the obligation of the employer to provide work and pay for it. This is combined…

Read more

Retain your control as a contractor to keep IR35 at bay

Control is one of the three key points that is used to determine whether a contractor is working inside IR35…

Read more

The importance of an IR35 Contract Review for private sector contractors

If you are a private sector contractor, you should be fully aware of the private sector IR35 changes that are…

Read more

What is IR35 and how does it affect you?

Whether you’re new to contracting or an old-hand, the issue of IR35 is never far away.  IR35 status affects your…

Read more

PSCs inside IR35 – Keep Calm and carry out some research

A week on since the Finance Bill 2017 became law public sector contractors who operate through PSCs are facing a…

Read more

IR35 Products & services

Caunce O’Hara’s partnership with Markel enables us to offer a broad range of IR35-based products to protect contractors, fee-payers and end clients across the UK.

IR35 Hub Related IR35 content