Top 10 ways contractors can beat an IR35 investigation

There are probably more than ten in total, but here are the top 10 ways contractors can beat an IR35 investigation, writes Nikola Nowak, tax consultant at Markel.

1. Set yourself up for success 

This first tip is unlikely to be something you want to hear at the point of an active HMRC enquiry being underway. But prior due diligence is vital!

Ensuring your contract and working practices were reviewed by a tax professional (who had a good understanding of the IR35 legislation), could make the world of a difference. Having a review in your locker is especially helpful to identifying and renegotiating unhelpful terms.

Setting yourself up for success if you’re scrutinised by HMRC also means considering taking out professional expenses insurance. This will cover any professional fees incurred by your adviser in dealing with your enquiry. And that could save you thousands of pounds!  

2. Collect evidence   

Almost needless to say, keeping records of important documents, receipts and contracts will ensure that you have the right evidence at the ready if HMRC needs to look through your company’s archives. This applies to all enquiries, not just IR35, so it’s good practice.  

Along with basic housekeeping, we would also recommend keeping evidence of any instances where your working practices clearly demonstrate that you are not a disguised employee.

Such evidence could include instances where you may have exercised your right of substitution, or disagreed with the client and provided the services as you saw fit, or where you have turned down work. These are all healthy pointers towards self-employment.  

3. Exercise your right to substitution 

Where possible and convenient we recommend that you utilise your right to send a replacement. This is a key factor for determining status, and could provide an impermeable argument.  

And of course, where you do send a substitute, make sure that you remain responsible for the work undertaken and also for paying the substitute. Obviously keep records of the substitution and payment! 

4. Don’t be overly keen 

While it might seem like the right thing to do is be very helpful to a probing HMRC, it may work against you to give too much information. So only provide HMRC with the evidence they have requested and only for the periods that fall within the enquiry window.  

5. Keep to deadlines   

In responding to HMRC, make sure that wherever possible, you keep within the deadlines set.  

Unless explicitly stated, HMRC response deadlines are not statutory and therefore if you know you will not be able to make a deadline, get in touch with the HMRC officer as soon as possible to re-schedule a more suitable date.  

With regards to statutory deadlines, these should not be missed under any circumstances. Carelessness in this regard could leave your business with a hefty liability without the ability to argue your case further. 

6. Stay professional 

Remember that, while the aim is to stop the HMRC enquiry in its tracks, there is always a possibility that your case may end up in front of a judge. So don’t say anything you would not want a court to see! Always keep your responses professional and succinct -- and avoid making any comments regarding the conduct of an individual.  

If you have any complaints about the way your enquiry has been handled, you have the option to make a formal complaint to HMRC’s complaints department.  

7. Find the words 

You should avoid employment terminology throughout the entire IR35 enquiry. You operate as a limited company providing services to a client, not an employee, and as such you should put your answers forward in a way that is consistent with you operating as a business. 

8. Show a united front  

As part of their fact-finding, HMRC will speak to the end-client in question to discuss your working arrangements. It would be prudent to approach your client as soon as you know of an enquiry to make sure that they are aware that HMRC will contact them in the near future.  

This is not to say you should put words into the client’s mouth! But make sure that the client knows what kind of terminology to avoid and how to explain what they mean without implying the opposite to HMRC.  

9. Know IR35 case law 

Hopefully, the Revenue enquiry gets dropped before it gets to the stage of presenting technical arguments. However you should still have some understanding of case law surrounding status and IR35. 

You need to have a good knowledge of personal service, control, mutuality of obligations and in-business factors. And you should grasp how the courts look at these factors.  

Please note here -- the most recent IR35 cases may not be the best ones to extrapolate from. TV and radio presenter cases don’t always follow the usual ‘pattern’ and often the conclusion is not what one would expect. Related, the way celebrity-types or broadcasters operate is different to most limited company contractors in other industries/professions and therefore the points raised in these high-profile cases may not apply to you.  

10. Ask for help 

If this is an option, engage with a tax specialist to deal with the enquiry on your behalf. 

Enquiries are complex and stressful, and while it may seem like an additional expense at a time where money is a cause of anxiety, it may save you a tax bill in the long run. You have a higher chance of success if you engage someone with experience of handling HMRC enquiries and a solid understanding of IR35 legislation. 

Even simply knowing you’re in safe hands and that everything will be handled for you can provide peace of mind!

Tuesday 4th Jul 2023
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Written by Nikola Nowak

Nikola started her journey with Markel Tax in 2017 as an office administrator working within numerous areas of Markel’s business including dealing with client schemes, contract reviews and the Survive35 TaxSafe product. Nikola joined the contractor solutions team in 2019, where she gained a deep understanding of the contracting industry - specifically IR35 legislation, employment status and the agency legislation. She currently deals with all types of IR35 issues, CIS and handles HMRC enquires, and now advises all types of clients and accountants in these areas.

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