Information

What to expect from a HMRC IR35 investigation

Avatar
Last updated January 20, 2021
Main article image

If you receive a letter from HMRC regarding an IR35 enquiry it is important that you seek advice from an IR35 expert immediately. If you have the Caunce O’Hara Tax Enquiry and Legal Expenses Insurance (or any similar policy) it is vitally important that you make your claim straightaway.

 

Seeking professional advice

An IR35 enquiry is not something you should 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 only too happy to interpret the facts to suit their arguments.

For these reasons, our Tax Enquiry and Legal Expenses policy ensures that you are appointed with an IR35 specialists consultant to take you from the opening ‘Check of Employer Records’ Letter through to Tax Tribunal if necessary.

But even if you are not insured, engaging an IR35 expert for their professional advice from the outset will give your case the best possible chance of success.

 

The initial letter and your response

The typical opening ‘Check of Employer Records’ letter starts with an opening paragraph such as:

“Every year we check the records of a number of businesses to make sure they are correct and complete and that the business is paying the right amount of tax and National Insurance Contributions (NICs). We have now selected your business for a check.”

The key paragraph often come on the second page after HMRC have asked for the contractual paperwork relevant to the period under enquiry (often the last full tax year or company accounting year-end):

“Will you please also 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.”

There are two things at play here: firstly, it gives you the opportunity to set out your position and why you believe that your engagement is outside of IR35; secondly, it is a less than subtle hint 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 where the IR35 specialist begins to earn their corn. They will not only want to review the contract(s) and highlight the positives, but will also grill you about the actual working practices with a view to demonstrating that these support the contractual terms.

When this change in enquiry approach was introduced, our colleagues at Markel Tax, found that a really detailed response to this letter had a one in three chance of closing down the enquiry. Yet, it seems that HMRC case officers have reverted to their old intransigence and rarely accept the response, but will usually respond themselves with a working practices questionnaire that might have over a 100 questions and will certainly want to approach the end client for their view.

Whilst this presents the danger someone within the end client may be responding who has little knowledge of IR35, or even the engagement that you were working on, the consultant should be able to challenge non- specific statements from the end client and HMRC know that if the matter is headed for Tribunal that any poor fact finding on their behalf will be exposed in court.

If HMRC do not accept the initial response, then this can be the start of what can only be described as trench warfare with 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.

 

Alternative dispute resolution (ADR)

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.

Each application is considered on a case by case basis. ADR is not a statutory process and HMRC reserves the right to reject applications that we do not consider appropriate for ADR.

Markel Tax has successfully resolved a number of cases in this way, but the work involved is not far short of preparing for a First Tier Tax Tribunal. If ADR cannot resolve matters then going to Tribunal might be the only option open to the contractor.

We have an unrivalled track record of success in this area, including successfully representing the taxpayer in the first IR35 case Lime IT v Justin (2001), with many more successful IR35 disputes won since then.

 

Going to tribunal

Only a taxpayer can apply to go to tribunal, although HMRC can force the taxpayers hand by raising assessments which the taxpayer wishes to appeal. Once again, it would be unwise to go into the lion’s den without professional representation.

If you want to gain a greater understanding of how a tribunal hears a case, then it is worth reading a judgement – they are not just dry documents full of legal jargon, but often offer a real insight to the impressions that the legal teams, witnesses and taxpayer made upon the judge.

However, they do tend to follow a very clear format: a review of the contractual terms and the legal argument presented by both parties.

Then via cross examination of witnesses for both sides, an attempt to understand the working practices which underpinned the engagement. The judge sums up the arguments and then offers a conclusion which will either allow the appeal (the taxpayer has successfully overturned HMRC’s decision) or dismiss it the appeal in which case HMRC will be seeking to collect the tax due.

This may not be the end of the matter, as the losing side may wish to appeal to an Upper Tribunal or even ultimately to the Court of Appeal.

However, unless there is a significant point of law at stake or sufficient evidence to suggest that the Tribunal has made an incorrect decision, the First Tier Tribunal is often the last stage in the journey, albeit very few cases even make it that far.

This can be an expensive process for legal fees and expenses, so it might be a good idea to consider Legal Expenses Insurance just in case you ever get an enquiry. By the time that check of Employer Records Letter lands on your doormat, it will be too late.

 

Private sector IR35 is only a few weeks away. Don’t leave it too late to ensure you are prepared and covered in case you are subject to an investigation. Contact 0333 321 1403 today to discuss Caunce O’Hara’s IR35 insurance options.


Avatar
Last updated January 20, 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