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IR35

What to Do if HMRC Ask For Proof of Your Employment (IR35) Status?

What to Do if HMRC Ask For Proof of Your Employment (IR35) Status?

IR35 basically refers to two different sets of tax legislation. They have been designed to combat any kind of tax avoidance by employees or workers as well as the firms hiring them. This anti-avoidance tax legislation system in the UK has been designed to confirm the operation of a genuine business as opposed to the ones that work outside the IR35 rules. Hence, the importance of this rule cannot be stressed enough when filing your tax return every fiscal year.

But what happens if you have been selected by HMRC for an IR35 enquiry? How to handle an IR35 investigation? What will you do and what should you do if you are the target? Let us find out!

The First Letter by the HMRC and Its Response

An unremarkable letter arriving from the HMRC is how IR35 enquiries usually begin for most people. It will be titled something along the lines of ‘Check of employer records.’ The letter will go on to mention that you or your company has been selected for a ‘check.’ That said, you probably won’t see any mention of the IR35 rule until the subsequent paragraphs.

When this letter arrives, the first and foremost thing to keep in mind is to word the response of this letter very carefully. HMRC will ask through the letter if you have considered the IR35 rule and when was it considered. And if you have, how did you arrive at the decision that you are not inside IR35? If you did get your contract and working practices reviewed through a professional, it’s important you highlight this, as it will to demonstrate reasonable care was taken and reduce penalties (if any), in case HMRC is able to prove IR35 does apply to the engagement.

At this stage, it is crucial to offer them accurate and strong evidence to ensure that you do not get caught in the shackles of the IR35 rule. This is because you manage to deliver a satisfactory and detailed response at this stage; it is likely that the HMRC might accept your explanation without any further questions. However, if you fail to issue an appropriate response, they are likely to dig deeper into the IR35 position of the contractor.

In this regard, it is also pertinent to mention that if you have a tax enquiry cover of any kind, now would be the time to get in touch with your insurance provider. You must do that prior to drafting any response to this letter because experts will be able to handle this correspondence in a much more professional and shrewd manner with the HMRC right from the start.

The Follow-Up Arguments

The arguments that follow constitute a part of the lengthy IR35 enquiry that will take place if your response proves to be unsatisfactory and they refuse to accept your provided evidence. They will then begin an in-depth review of the entire situation.

This includes analysing your working practices, written contracts, as well as trying to ascertain the true facts of the matter. There exist countless pitfalls at this stage that you might not be able to foresee. This is why it is highly recommended that you avail the services of a professional IR35 tax specialist who can ensure that you do not get caught unwittingly.

One of the very first things that will be done by HMRC is to meet the contractor. Typically, HMRC assigns two compliance officers who delve into the actual business and working practices of the contractor. It is noteworthy that even though HMRC can request for a meeting, you can choose not to agree to that request and deal with their questions through correspondence exclusively.

That said, if your IR35 consultant is acting on your behalf, you must consider meeting them as the process will speed up significantly. The HMRC is likely to get in touch with your end client if they are still not satisfied, and this can be potentially dangerous.

This entails the HMRC sending a rather lengthy questionnaire containing around 70-80 questions, to be completed by the end client. It will ask countless questions about the contractor and the working practices. The end client must manage this situation carefully by someone who is fully aware of precisely what they are doing.

This is because if this correspondence is handled by the HR department or any other individual who has no knowledge of the workings of the contractor, it could pose a risk.

IR35 enquiries are always rather long and can even last a number of years in some cases. Therefore, you must put your best foot forward so as not to get stuck in a legal quagmire that is difficult to get out of.

Final Words
An IR35 enquiry is a serious thing and must be given the consideration it needs. If handled negligently, it can result in a lot of chaos and trouble for you. Therefore, it is best to hire experts such as DNS Accountants who have years of experience under their belts when it comes to handling such cases.

Moreover, embarking on this route is likely going to be an expensive affair. So, it is best to have specialists backing you up.

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.