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How does an IR35 enquiry typically play out?

A step by step look at HMRC's investigation process

Having already written to nearly 1,500 contractors who were engaged by the pharmaceutical giant, GlaxoSmithKline, in the tax year 2018/19, HMRC recently admitted that it has its eyes set on the pharmaceutical industry, in particular. 

After telling Contractor UK that sending identical letters to GSK contractors was “routine compliance activity”, an HMRC official then went on to state that “we believe there is more of a mis-categorisation risk of employment status in the pharmaceutical industry.”

While Qdos disagrees with the notion that there was anything “routine” about HMRC’s latest attack on contractors, the tax office could be readying itself for widespread IR35 compliance checks, whether in the pharmaceutical industry or otherwise.

Therefore, to offer you some clarity should you receive a letter from HMRC in the coming months, we thought you would find it useful if we outlined the typical IR35 enquiry process for contractors who have set their own status.

1. Letter received from HMRC

HMRC will likely write to you about your IR35 status, focusing on a specific contract and tax year. The letters sent to GSK contractors, for example, are aggressive even for HMRC’s standards, but this could be a sign of things to come. They effectively work off the premise that contractors are guilty until proven innocent. Therefore, should you receive a letter, we recommend that you consider contacting an IR35 specialist immediately, as our CEO, Seb Maley, explains in this video here.

2. Formulate a response

Working off the assumption that you contact an IR35 expert for help, the next step is to formulate a response with your advisor. A specialist will tend to conduct an IR35 contract review and, should they come to the conclusion that your contract belongs outside the legislation, they will outline to HMRC the reasons why they disagree with the tax office. 

In addition to a letter, an IR35 advisor will usually submit a range of evidence in an attempt to prove to HMRC that your contract is rightfully outside the legislation.

3. A meeting with HMRC

With your position made clear to HMRC, should they not accept your position - which rarely happens - you might be asked to meet tax officials to discuss the case face-to-face.

While the idea of being interrogated by tax officials is unnerving, don’t panic. You are under no obligation to attend a meeting. In fact, our advice to you is to decline the offer - something that one of our IR35 experts can do on your behalf, requesting that HMRC submits questions in writing instead. Handling HMRC this way means you’re able to give considered responses that can be shown as evidence if and when needed.

4. End-client contact

The tax office will usually then get in touch with your client. However, in the GSK scenario, for example, it’s possible that the end-client has already been contacted. The likelihood is that the taxman has already seen these contractors’ written contracts. 

Vitally, however, HMRC has not reviewed GSK contractors’ working practices. Given these can offer greater clarity regarding IR35 status - because they will reflect the reality of the engagement - it’s impossible for HMRC to say at this stage with any confidence that contractors are in the wrong. 

Having collected all the information HMRC thinks it needs from your end-client, the taxman will then review everything before returning with a view on the matter.

5. The decision

If HMRC concedes and agrees with you, the enquiry will simply close down, meaning you do not need to make the ‘deemed payment.’ In other words, you will be in the clear.

If, however, HMRC decides your contract belongs inside IR35, the tax office will demand that you retrospectively pay the income tax and National Insurance contributions missed while operating outside IR35, plus interest and perhaps even a fine. 

Rest assured, you are able to contest HMRC’s decision. You can do this in two ways:

Alternative Dispute Resolution (ADR): This is typically the first step when looking to overturn what you (and your IR35 advisor) believe is an incorrect decision made by HMRC. In this scenario, another tax inspector, but one without any prior involvement in the case, will mediate and offer a second and supposedly independent opinion.

1) Alternative Dispute Resolution (ADR): This is typically the first step when looking to overturn what you (and your IR35 advisor) believe is an incorrect decision made by HMRC. In this scenario, another tax inspector, but one without any prior involvement in the case, will mediate and offer a second and supposedly independent opinion.

2) Tax Tribunal: Should an ADR not prove successful, the case may progress to a First-tier Tax Tribunal in which you can appeal against a decision HMRC has made. While this could take some time, it will result in an independent judge reviewing the case in detail and ultimately giving a verdict. 

Given the potential costs involved when handling an IR35 case, many contractors choose to take out IR35 insurance, in the event that HMRC does investigate. With regards to letters received by GSK contractors, Qdos will offer updates on the situation as and when they develop.

With over 25 years’ experience, Qdos is a specialist contractor tax, IR35 and insurance adviser and we review on average, over 1000 contracts every month. Since 2000 and the introduction of the IR35 legislation, we have handled more than 1,600 IR35 enquiries, saving UK contractors over £35million in tax. 

By:Benedict Smith

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