5 ways contractors can minimise the risk of an IR35 investigation

We’re often asked how contractors can stop HMRC from launching an IR35 investigation into contracts they hold, or have held, writes Seb Maley, CEO of IR35 contract review firm Qdos.

But the fact of the matter is that you can’t ever rule out an investigation into your IR35 status as a contractor. Quite simply, HMRC will launch an IR35 investigation as and when it sees fit, where it suspects non-compliance with the Intermediaries legislation.

Fortunately, though, there are steps you can take that should reduce your chances of being probed under IR35.

Here, exclusively for ContractorUK, I want to highlight five ways contractors can minimise the risk of an IR35 investigation.

1. Demonstrate ‘due diligence’

It almost goes without saying, but it’s worth reinforcing this point. With IR35, you must regularly ensure that you’re operating compliantly with your current contracts.

Since the introduction of the off-payroll rules, contractors no longer shoulder the IR35 liability when engaged in the public sector or by medium and large private sector businesses.

However, given the reform doesn’t apply to small companies, contractors should take the appropriate steps to ensure their IR35 compliance when engaged by these businesses.

Independent IR35 status assessments help demonstrate that a contractor has determined IR35 status with ‘reasonable care’, which can help prevent an IR35 enquiry developing into a lengthy HMRC investigation.

2. Take your financial and tax obligations seriously

Taking your financial and tax obligations seriously means filing your limited company accounts and paying the taxes you owe – and making sure that you do both of these things on time!

A failure to meet these obligations – especially if it happens repeatedly – will attract the attention of the tax office sooner or later. HMRC has been known to investigate contractors’ general tax affairs to get its foot through the door, before focusing specifically on IR35 next.

So, practise best-practice. Meet the deadlines for filing tax returns and paying your tax bill. This gives the correct impression -- that you’re operating compliantly and you have nothing to hide.

3. Maintain a healthy paper trail

Alongside meeting your financial and tax obligations on time, you should also ensure that your business records are up-to-date and in good order.

Regular inaccuracies in your financial reporting can alert HMRC, even if they are just honest mistakes.

4. Appoint a qualified accountant

If you’re not confident in tackling the paperwork that comes with running a limited company – or with filing and paying your taxes by the relevant deadlines – an accountant can help.

Accountants have regulatory obligations around money laundering and tax avoidance. As a result, they are generally recognised as being good filters for HMRC, in that they do not tolerate or condone non-compliant behaviour or activity.

5. Explain fluctuations in taxable earnings

Another reason to consider appointing an accountant is that errors and inaccuracies across any of your financial statements – whether it’s year-end accounts, tax returns or anything else – are likely to draw attention.

The same is true if you’re reporting significantly variable taxable earnings over the course of several tax years.

There’s room to include notes in the corporation tax return, for example, where you can clarify and explain why there’s variance in taxable profits. If you appoint an accountant to manage your financial affairs, they could handle this for you, too.

Final thought

These are just some of the steps that you can take to minimise the risk of an IR35 investigation. But ultimately, no matter what preventative measures you take, you can never entirely rule one out altogether.

As such, a comprehensive IR35 insurance policy remains an important part of a contractor’s arsenal. A solid policy will provide you with expert IR35 defence and peace of mind, along with also covering resulting tax liabilities, interest and possible penalties up to the level of cover.

Wednesday 10th May 2023
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Written by Seb Maley

Seb Maley is an IR35 expert, regularly commenting in national media on the topic. He is CEO of Qdos Contractor, a leading IR35 advisor and IR35 insurance company.
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