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How is an IR35 Enquiry Carried Out?

With information of ‘the dangers of IR35’ common throughout blogs and articles at the moment, many contracting outlets fail to address some of the most important issues when it comes to operating compliantly, and the lengths HMRC go to when enforcing IR35. As a result of this, we have provided you with a step by step guide of an encounter with the Revenue, addressing how exactly an IR35 enquiry is carried out.

An IR35 enquiry is made up of four key stages. These are the opening letter, the response to this letter, correspondence/meetings with HMRC, and then the inevitable conclusion.

Step 1

All IR35 enquiries begin with an opening letter from HMRC. This will concentrate on either a tax year of the limited company, or the company’s accounting period. What contractors must be aware of is that HMRC can go back as far as 6 years into a limited company’s history, but normally in an opening letter the revenue will initially only concentrate on the one tax year.

The letter usually requests:

  • Analysis of company’s income falling in the period of enquiry.
  • Analysis of certain expenses, mainly travelling expenses incurred in the period of enquiry.
  • Copies of all contracts falling in the period of enquiry.
  • Factors considered to place the company’s contracts outside of IR35.
  • Contact details of end client(s).

Step 2

The next step of an enquiry is for the contractor to respond to HMRC’s initial letter, and this is a stage that in many cases, proves to be detrimental to the contractor. We advise that the response to HMRC is something that is not tackled without the proper guidance. We at Qdos can aid in this response process, and if the evidence provided in response to HMRC’s initial letter is to the Revenue’s satisfaction, then the enquiry will be closed down, thus highlighting the importance of this stage.

Step 3

If a contractor’s response fails to satisfy HMRC, then a meeting will be requested, commonly between two compliance officers and the contractor to establish the working practices. It is important to remember however that HMRC cannot insist on a meeting so should a contractor feel uncomfortable about such a prospect they can refuse and request that the enquiry continue by correspondence.

Following a meeting, HMRC will weigh up the evidence that was presented, and if satisfied will conclude the enquiry. If not, then they are likely to contact the end client to test the evidence provided to date. This is an especially dangerous time in an enquiry, as obviously the contractor is helpless, meaning that there is no idea what is being said between the Revenue and the end client. This period is one fraught with risks, and is something that should be carefully managed.

From this point, a sort of ‘to and fro’ argument begins, and it is this period that usually takes the most time, with cases reportedly lasting as long as 5 years, although the Revenue has now promised to execute IR35 cases in a considerably shorter time.

Step 4

The final stage of an enquiry is obviously the conclusion. HMRC will make a decision as to whether the contract(s) fall inside or outside of IR35. Should HMRC conclude that a contract is caught by IR35, the contractor has a right of appeal against the decision. If necessary, the appeal can be progressed to the tax tribunals. This should however be seen as a last resort due to the costs involved. Before considering taking an appeal to tribunal request an independent review and/or make use of HMRC’s Alternative Dispute Resolution (ADR) service.

Obviously, if it is determined that you are not working compliantly, and are caught by IR35, then you will be expected to pay out a considerable sum of money. For estimates of your tax liability, we have access to an IR35 calculator that will give you a calculated sum of the money you would have to owe if found to be inside IR35.

Qdos has aided over 1,300 contractors in defending IR35 cases, with an impressive win/loss ratio, having lost only 5 cases since the legislation was introduced. If you require any more information regarding our IR35 services, please feel free to browse our site, or alternatively give one of our team a call today.