HMRC Enquiries - How do they start?

[psychocandy]

I know its a bit of a grey area but on what basis do HMRC start doing enquiries on such things as IR35/section 660?

I'm guessing that once you start producing PAYE returns and VAT returns then there is the possibility that they will come looking.

But what about IR35/Section 660? Could they possibly come looking just on the basis of these PAYE/VAT returns? Surely at this point, until the CT return and accounts for first year is produced they dont have anything to investigate or info to go on?

As such, is there any point getting IR35 insurance until closer to this time? Or have I got this wrong?


Admin note: guide to contractor vat inspections here.

[LisaContractorUmbrella]

I believe the selection is random and they will have an inspection with the initial purpose of just verifying your various tax returns - specialist investigations would then follow if they had reason

[malvolio]

I believe the selection is random and they will have an inspection with the initial purpose of just verifying your various tax returns - specialist investigations would then follow if they had reason

It's a common myth that there is an IR35 investigation process. Investigations start as a result of either some discrepancies in your PAYE-related filings to HMRC, a standard VAT inspection or as one of a random set kicked off each week. As soon as Hector notices you're a filthy one-man contractor, he will inevitably send in the IR35 questionaire.

So one trick is to make sure all your returns are accurate and consistent. Don't give them an excuse to look in the first place.

[GeekyGrandad]

I believe the selection is random and they will have an inspection with the initial purpose of just verifying your various tax returns - specialist investigations would then follow if they had reason

HMRC have stated that they will consider those who take low salary/high dividend as more of a target than those who pay "the right amount of tax" because they view that tax avoidance (though legal) as a target for IR35.

[psychocandy]

I believe the selection is random and they will have an inspection with the initial purpose of just verifying your various tax returns - specialist investigations would then follow if they had reason

So it wont take place before any tax returns are submitted? Company or personal.

So not on the basis of PAYE or VAT returns?

[craig1]

So it wont take place before any tax returns are submitted? Company or personal.

So not on the basis of PAYE or VAT returns?

Most are purely random but there are some specific triggers that HMRC won't disclose to stop people working around them. There are also risk thresholds that can mean a far higher likelihood of getting the dreaded letter. Then there's the enquiry that comes from someone calling the evasion hotline about you.

[BolshieBastard]

There's a possibility you will have a VAT inspection (if registered ) once in the first 5 years of trading. It used to be once in 3 years.

IR35 investigations tend to come about as a result of a 'compliance visit' by HMRC Inspectors into all things regarding personal taxation. However, HMRC used to instigate IR35 investigations on a random basis and may still do so.

[philip@wellwoodhoyle]

HMRC are now rolling out a new form of "compliance visit" which is claimed to be a "softly softly" visit to "help" businesses comply with the tax regulations and should be about telling a business what they're doing wrong and giving them a chance to put it right, i.e. book-keeping improvements etc.

Apparently there's going to be a lot more of these than the previous regime of VAT and PAYE inspections. We've enjoyed a golden era of very few inspections over the past few years but I think that's now well and truly over. There's no need to wait until returns have been submitted - these inspections can happen almost immediately a new firm is set up under the guise of "helping" a new business!

The more worrying aspect is that these inspection aren't limited to just one type of tax - they're going to be "cross disciplined" so will include PAYE, VAT and corporation tax all in one go. The people doing the inspections will probably be "jacks of all trades" and trained only in the basics but no doubt with instructions to report back to more specialist colleagues if they see specific issues they've been told to watch out for.

Whether IR35 and S660 are topics they'll report back on isn't known - I'd suspect not generally because of the sheer number of companies that may be picked up would swamp the relatively few specialists. I would imagine that they'll have far more specific instructions - i.e. not to report back on all firms doing the low salary high dividend route, but only those with other potential IR35 triggers such as the same single customer throughout the year. The last thing the specialists will want is every husband:wife company being flagged up! The specialists will probably concentrate on what they already do - i.e. find a particular "employer" such as BT or whatever who are known to use "bums on seats" contractors and go in and get a room full of people caught by IR35 in a single job lot!

[craig1]

Even getting a mortgage could trigger one, especially if you self-certify.

[LisaContractorUmbrella]

From June 2011 IR35 forum - gives an idea of HMR&C thinking for the future:

IR35 National Compliance Unit
HMRC said that there was a need to be able to address wider low level risk by use of interventions other than traditional IR35 Reviews. HMRC described the role of this proposed Unit and how it might operate. If, for example, it was identified that there was a particular sector where there might be a problem about understanding IR35, HMRC could write to the parties involved informing them of the requirements of IR35 and where to get further advice. This could be backed up by providing additional publicity via the sector's representative bodies.

It was suggested that before targeted letters are issued, general guidance should be published. The view was expressed that HMRC needs to review its guidance which some feel is inadequate. HMRC committed to reviewing its guidance but emphasised that if there are perceived inadequacies, it is important that specific problems are brought to HMRC's attention.

IR35 Compliance Teams
HMRC explained that these teams would be responsible for compliance reviews of high risk cases. The IR35 teams would follow (as they do now) the same approach to compliance activity as in other areas to ensure consistency of practice. HMRC said that it welcomed feedback on their current operational compliance activity. It was obviously important that those who might be affected knew as soon as possible if IR35 was potentially applicable.

HMRC acknowledged that where a full compliance review is undertaken, the focus should be on concluding the review as quickly as possible. This is important both to minimise disruption to the taxpayer and to make the most effective use of HMRC's resources. HMRC is reviewing how compliance reviews are conducted and agreed that it was not acceptable for large numbers of questions to be automatically asked in every intervention.

HMRC were told that decisions on IR35 cases appeared to take a very long time. HMRC said that it had an interest in getting cases settled without delay, but it could only do this if it could obtain the necessary facts. Peculiar to IR35, as opposed to general status cases was the need to obtain facts from the end client. Improved guidance would hopefully speed up the resolution of such reviews by promoting transparency of process.

It was agreed that there are a number of detailed issues regarding how HMRC undertakes compliance activity and how it reaches decisions which will need to be explored as part of developing improvements in the way IR35 is administered.

IR35 Risk Assessment
HMRC explained that it was content to share details of its broad risk strategy but would not be able to share details of its specific risk profiling. HMRC further explained that its initial risk assessment eliminated certain kinds of cases, and that it critically assessed the rest before deciding if further action was necessary.

HMRC acknowledged that in the early years of IR35 it had adopted less refined selection criteria than used now. Processes for selecting IR35 cases had been improved. The proposed new strategy whereby low-mid risk would be addressed through interventions other than compliance reviews, should address the current position where because the only principal type of intervention is a review, lower risk cases have been the subject of a compliance review.