What happens in an HMRC IR35 investigation?

The dreaded brown envelope from HMRC has arrived -- surely that can only mean one thing? Tax is due! Fortunately this isn’t always the case.

Here, exclusively for ContractorUK, let me look at what happens when that envelope is effectively HMRC selecting a contractor for IR35 investigation, writes Georgina Hiles, senior tax consultant in contractor solutions at Markel.

An HMRC IR35 investigation: Phase One

The first stage of an IR35 investigation will begin with this opening letter from HMRC. The letter is usually titled ‘Check of Employer Records’. This will be in respect of a particular tax year (or years), with the focus on whether or not any of the contracts a contractor has entered into with its clients, fall within the IR35 legislation.

Within this first letter, HMRC will ask for all statutory records, including a list of all payment during the tax years in question, including date of the payment, name of the payer and name of the ultimate recipient of the services (if this is different from the payer), along with all written contracts under which the services were provided.

Paperwork, policies and procedures during an IR35 investigation

In addition, HMRC will also ask for all correspondence including letters of appointment, assignment schedules, handbooks, job descriptions and standard operating policies and procedures. They will further request copies of invoices and timesheets relevant to the contracts under review. HMRC will be keen to know whether there were any previous engagements with the end-client before the review years i.e. whether as a contractor or employee.

Once all of this information has been submitted to HMRC, they usually follow up with a meeting request to establish the facts of what occurred in practice. However, this meeting is not necessary, and it is always advisable that any information is suppled via written correspondence.

Next up? The fact-finding stage of an IR35 investigation

This is the point at which a review then enters into the ‘fact-finding’ stage. So the contractor will receive a questionnaire with a list questions relating to working practices. HMRC will also contact the end-client or agency with a similar set of questions. This is because HMRC will look to scrutinise the contract for any discrepancies between the contract and what happened in practice.

Unfortunately, fact-finding can go on for many years and, dependent upon the tax years under enquiry and whether they are close to becoming time-barred, HMRC may decide to issue Regulation 80 determinations and Schedule 8 notices as protective measures. These must be appealed within 30 days of the date of the determination, requesting that all tax and NIC is postponed while matters are under appeal.

Your right to an independent review

Once fact-finding has been completed, HMRC will issue a formal opinion along with Regulation 80 determinations and Section 8 Notices, if not already issued. If HMRC’s opinion is that IR35 applies, the contractor can exercise their right to an independent review.

This is an important stage in which an argument is put forward highlighting the strengths of the case and why you disagree that IR35 applies. An independent HMRC officer, with no prior involvement in the case, will then assess all of the facts to see if they reach the same conclusion. Once this has been completed, a ‘view of the matter’ letter is issued. It is at this point that the only recourse will be to appeal to the tribunal and/or request HMRC Alternative Dispute Resolution (ADR).

What is Alternative Dispute Resolution, and is it any good?

ADR is when a contractor and HMRC get together to try and resolve the issue with a mediator. From our experience, ADR will only be successful if there are new facts presented which have been missed, or if the case has been taken over at a later date by an IR35 specialist.

ADR does not usually succeed if the argument presented is solely focused on case law and your adviser has already come to an impasse with HMRC. In our opinion, it would be better to save costs and time and appeal to the tribunal, where a more legal argument can be presented.

Tribunal timeline if probed under the Intermediaries legislation

If a contractor decides to appeal to the tribunal, they will need to complete a notice of appeal form and submit to the Tribunal Service within 30 days of the date stated on HMRC’s view of the matter letter (or confirmation of this following the independent review).

This is essentially a request for a judge from the First Tier Tax Tribunal to decide the dispute with HMRC. Once the appeal is accepted, the tribunal will then issue directions which must be followed by each party adhering to certain dates. Once the case has been heard and a judgement issued, the IR35 enquiry is complete unless the contractor decides to appeal to the Upper Tax Tribunal.

Unfortunately it is very common for IR35 enquiries to remain open and unresolved for several years following issue of the initial Check of Employer records letter. There is no denying that an IR35 investigation can be a very stressful, time-consuming and costly process.

Lastly, our IR35 investigation survival guide…

So how do you survive, let alone beat an IR35 investigation? We’ll reveal the answer to that ultimate question shortly on ContractorUK. But in short? It is imperative to ensure that contracts and working practices are reviewed from the outset of any assignment, to form the basis of a robust defence should HMRC decide to open a future enquiry. In our experience if an engagement is genuinely outside IR35, and this is demonstrated within the contracts and supported by the working practices, it is unlikely a case will go as far as independent review.

Thursday 18th May 2023
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Written by Georgina Hiles

After joining Markel Tax in 2002, Georgina studied law and developed her skills before making the cross-over to the tax profession in 2013. Georgina specialises in the legal and technical intricacies of the interaction between employment status, IR35 and agency legislation within industries targeted by HMRC. Georgina advises and defends clients against HMRC challenges including representing clients who opt to use HMRC’s Alternative Dispute Resolution process.

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