How to beat an IR35 enquiry
The key to success in an IR35 enquiry is to understand what your position is and weigh up the prospects of success in order to win the case, writes Mollie Shields, a tax consultant in contractor solutions at Markel.
Winning on IR35 against HMRC can be achieved with the utilisation of case law, evidence, tactics and seeking the advice of those tax professionals who really understand both the process of arguing an enquiry and the Intermediaries legislation (or the off-payroll working rules).
1. Important: provide and keep accurate evidence
From the first point of contact with HMRC, it is important that what is provided is accurate and will help support your arguments at a later date.
From day one, if you proceed on the basis that everything provided could be used as evidence at tribunal, this should hold you in good stead by helping to shape the information provided and your responses. Think - would you be happy for this, and this next item, to be presented before tribunal?
Thorough due diligence builds solid foundations for success. Operating compliantly, in line with genuine self-employment and being able to demonstrate this will be helpful in supporting your case.
Have you ever had a contract review that has been given an outside determination by a tax professional? Utilise it for your evidence. Have you ever provided a substitute? Provide an invoice, as evidence, where the replacement has provided services on your behalf.
2. Responses and delays
In our experience, especially when the pandemic hit, HMRC case workers seemed to be deployed elsewhere. This meant that HMRC officers changed, simply were not responding or eventually providing holding letters. While HMRC’s activity on IR35 has started to return, the number of caseworkers seems to still be an issue. Keeping on top of replies and pushing for responses -- regardless of how frequent HMRC’s activity is -- can have a positive impact.
Usually in an IR35 enquiry, HMRC will agree to a 30 days’ response or provide a specific date they want a reply from you. Providing information within agreed timeframes shows co-operation and keeps things moving.
However, if a timeframe is not reasonable, or if a large amount of information is requested by HMRC, always ask for an extension as soon as possible. Generally, any timeframes outside of a formal notice or determination can be moved.
If HMRC does not provide a response within their agreed timeframe, chase. Keep the pressure on. You want your IR35 enquiry over with as soon as practically possible, so that you can continue with your business. If there are persistent delays or multiple changes in caseworker (meaning you have to start from scratch each time), you could also contact HMRC’s complaints department and make an official complaint.
3. Know your statute
There are occasions where time limits cannot be extended. This is because the time limit has been set by legislation, not HMRC. In an IR35 enquiry, the two main time limits to note would be ‘Determination’ and ‘Independent Review.’
A determination must be appealed within 30 days of the date of the notice.
An Independent Review must be requested within 30 days of the date of HMRC’s “view of the matter” (which may be within the same covering letter as the determination).
Once an Independent Review is completed you must apply to the tribunal within 30 days of the date of the Independent Review conclusion.
These statutory time limits must be complied with. Failure to do so can have disastrous consequences -- as we have seen in the IR35 case of Sky Sports presenter Barry Cowan.
4. Meeting HMRC isn’t an obligation, and isn’t advised
As part of the IR35 enquiry process, HMRC may ask to meet with you in person to discuss the working arrangements and documentation.
This meeting may come across as an obligation, but it certainly isn’t. We advise our clients that any questions are best put in writing so there is an evidenced paper trail, such as emails and letters.
Not only does asking HMRC to put its queries in writing give you the opportunity to calmly assess and approach the questions one-by-one and with a rational mind, without the pressure of HMRC waiting for your verbal response, but facts discussed within meetings can be misinterpreted. This misinterpretation is especially likely if experience in this area is lacking. Keeping a paper trail keeps evidence factual, with less room for subjective interpretation or miscommunication.
5. Your end-client talking to the taxman? Be Prepared
Almost certainly HMRC will talk to your end-client.
If you make contact first with your end-client and gather information, this will always stand you in good stead. However, more often than not, HMRC will be the party which quickly gathers this information, and it is important you prepare for this.
To do so, ensure you request all information obtained by HMRC, review it and counter anything you feel needs to be addressed. Is the person providing the information from the end-client the most appropriate person? Do you actually know them? Did they have any interaction with you? If there are holes in the information provided by HMRC, tell them.
6. Understand IR35 and IR35 case law
When operating via a limited company, you should already have some understanding of IR35 in order to assess this as part of your self-assessment tax return. It is vital in your arguments to have knowledge of the key status tests regarding personal service, control and mutuality of obligation and how these factors impact upon your contract engagements.
There may be stages during the IR35 enquiry where you need to support your arguments with case law. For example, if HMRC are stating ‘Control’ is present, what evidence do you have to show a lack of control, and is there a case you could cite to support this?
HMRC at once, you do not want to fall foul of providing too much evidence, too soon. Only provide information and evidence that has been requested for the tax years under enquiry, unless of course such information and evidence can have a positive impact on your technical argument.
It is also vital to stick to the facts of the present case. Only the facts which have been established are key, and not what HMRC may think may happen or may liken to happening with other contractors.
You must ensure that you keep the focus on the fundamentals of Personal Service, Control and Mutuality of obligations. These three are the decisive factors, with in-business factors to be considered secondary factors.
7. Experience with HMRC is hard to imitate
IR35 enquiries can be extremely stressful and time consuming and they do not come without their challenges but in our experience, utilising professional help rather than the ‘going it alone’ approach can provide higher chances of success ( especially if the case gets as far as tribunal stage).
IR35 enquiries require a lot of fact-finding, understanding of the legislation, case law as well as using tactics relating to HMRC in order to fight your case. Wading into these unchartered waters with professional representation is tricky enough, but without representation is on another level of difficulty. You are therefore well-advised to be advised, formally, if you do find yourself subjected to an IR35 enquiry.
Having a third-party specialist check answers and responses can prove invaluable, even to have a buffer between you and HMRC (or simply another person to be able to “rant” to who understands IR35 and HMRC) provides many contractors with peace of mind.