HMRC IR35 Investigation – How it works for Contractors / Freelancers

HMRC IR35 Investigation
HMRC IR35 Investigation

HMRC IR35 Investigation

This article about a potential HMRC IR35 investigation is by top tax expert David Greene. It is very useful to know for contractors. To be forewarned about them is to be forearmed.

HMRC IR35 status inspections have taken a much longer and tougher course.

Whereas in the first couple of years of IR35, it was easier to overturn a HMRC decision with a few carefully worded reports from an employment expert, recently the investigations are taking a year or longer to complete.

HMRC Persuading Contractors by Fear over IR35

The issue is not that the law has changed. Instead it appears that by dragging out the investigation and it costing the contractor more, HMRC are persuading contractors by fear to declare for IR35.

It‘s a bit like a large Plc winning a court case as it has more money and lawyers.

Fortunately the stones of self employment are still more able to slay the giant, than the giant prove an employment relationship.

HMRC Investigations and Procedures

The current investigations and procedures of HMRC generally work like this:

1. HMRC Sends Letter of Inspection

HMRC sends a letter of inspection to the Contractor.

2. HMRC IR35 Investigation

After the contractor responds to questions or an inspection visit, HMRC suggest that unless the contractor can prove otherwise, they are inside IR35 and must pay the associate high taxes.

These additional taxes are generally around 20% of the value of the contract. HMRC can legally do this. That’s because the burden of proof lies with the contractor in disproving the HMRC‘s opinion.

3. Contractor Appeals Decision

The contractor retains specialist advice to appeal this decision and to indicate by applying the law to the working characteristics, self employment is present and not employment. This stage takes many months and probably a long interview with HMRC.

4. HMRC Visits the Contractor

HMRC procedures then oblige them to visit or write to the clients of the contractor. That’s to investigate the characteristics of the relationship.

5. HMRC Provides Formal Opinion on IR35 Status

After the inspection of both parties, HMRC will then provide a formal opinion on IR35 status.

6. Contractor Can Appeal Decision to Tax Tribunal

If HMRC declares the contractor inside IR35 at this stage, the contractor can appeal the decision to a tax tribunal known as the tax commissioners. Otherwise they must pay the taxes.

One can see easily how this process takes a year to complete.

HMRC IR35 Investigation – Legal Requirements

Contractors must remember that both parties have a right to argue the case. Also, the law requires much stricter characteristics to identify a relationship of employment than as self employment.

For this reason HMRC has had very little success, if any, against contractors who have taken professional, pre-emptive and pragmatic steps to crystalise their status as being outside of IR35.

David Greene
Nasa Consulting

For more very useful articles on tax for contractors click on Tax.

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