IR35 Tax Investigation
What happens when contractors come under an IR35 tax investigation?
Most contractors must dread the approach from HMRC when they decide that you are inside IR35.
The first step is to try and convince them that you aren’t, hopefully with the aid of an accountant.
You need to know what you can do and what is happening to you.
If you can’t convince them, with your accountant’s help, that you are not outside IR35, then you will need to take the next step.
However, despite what you are thinking, you probably won’t need to.
Winning IR35 Cases
IPSE (ex-PCG) have a great record in winning tax cases against HMRC. More than 90% of these involve IR35.
Most of those cases don’t need to take the next step up the line.
Also, other accountancy firms have good records. I hear that one has a 38-0 record, although I don’t know how many of those involve IR35.
However, if HMRC still won’t buy it, they will give you the choice as to the next step. Even if, for some reason that you are not, make sure that get that choice.
General Commisioner or Special Commissioner
You will get a choice as to whether to go to the General Commissioner or to the Special Commissioner.
The advantages of going to the General Commissioner are that you will get an answer more quickly. Therefore it will be cheaper for you.
The downside (or possible upside) is that the General Commissioners are less qualified than the Special Commissioners. They are more or less lay people – a bit like local magistrates.
The Special Commissioners are a lot better qualified and knowledgeable. They tend to be ex-HMRC people or accountants etc. Their brief is to be independent arbiters, even if they are ex-HMRC men.
Simple Cases for General Commissioners
The idea is that you would go to the General Commissioners for simple cases, but for more complicated cases you would go to the Special Commissioners.
However, it is not the case that if you go to the General Commissioner first, and don’t like the verdict, that you can then go to the Special Commissioners to reverse it.
Both the General Commissioner and the Special Commissioner are appointees of, and are responsible to, the Lord Chancellor’s Office.
IR35 at the High Court
After going to the General or Special Commissioners, the next step is the High Court.
In practice the major accountancy firms that deal with contractors are advising that you should go to the Special Commissioners first.
It may be cheaper and quicker to go to the General Commissioner, but not if the next step is the High Court which could cost you in excess of £50,000.
The advantage of going to the Special Commissioner is that they are experts, probably more expert than HMRC, and are far less likely to make a mistake, resulting in your going to the High Court.
In the successful Lime-IT case, Lisa Fernley won it very decisively at the Special Commissioners. In a High Court case, Gordon Stutchbury, lost his at the General Commissioners, although, it has to be said that he represented himself.
However, if the major IT accountancy firms are recommending the Special Commissioners, then it would be wise to take their advice.
For an IR35 tax investigation, to be forewarned is to be forearmed.