A Contractor’s Guide to IR35 - Part 5
In A Contractor’s Guide to IR35 - Part 5, we’ll help you to understand more about the process of a HMRC investigation, going to tribunal and how you can protect yourself in these circumstances.
What should contractors expect from a HMRC investigation?
If you receive a letter from HMRC regarding an IR35 enquiry, it’s vital that you seek advice from and IR35 expert immediately. If you are a Markel customer, holding Fee Protection Insurance, it’s important that you make your claim straightaway.
Firstly, above all, seek professional advice if you are being investigated by HMRC.
IR35 legislation is complicated with legal arguments based around case law, instead of any clear legislation. If you are investigated, you’ll be facing HMRC case officers who will no doubt interpret the facts to suit their arguments.
With our Fee Protection Insurance, you will be provided with an IR35 specialist consultant who will support you from the initial ‘Check of Employer Records’ letter through to the tax tribunal, if needed.
Even for those who are not insured, you should still seek the services of an IR35 expert who will be able to offer you professional advice from the start, which will give your case the greatest chance of success.
The initial HMRC letter
Typically, the opening ‘Check of Employer Records’ letter will begin with an opening paragraph along these lines:
“Every year we check the records of a number of businesses to make sure they are correct and complete and that the business is paying the right amount of tax and National Insurance Contributions (NICs). We have now selected your business for a check.”
The most important paragraph is often found on the second page, after HMRC have requested the contractual paperwork from you, relevant to the period under investigation (usually the last full tax year or company accounting year-end):
“Will you please also tell me whether you have considered the possibility of the company being subject to what is commonly referred to as the IR35 legislation? If you have, and have concluded that the company is not subject to that legislation then please explain to me the basis upon which you arrived at that conclusion. I am asking this to help me be fully aware of and understand any view you may hold on the application of the IR35 legislation.”
How should contractors respond to a HMRC letter?
There are two things to consider when responding to a HMRC letter:
- It gives you the chance to set out your position and explain why you believe that your engagement is outside of IR35.
- HMRC want to establish if you can prove that you have undertaken the due diligence needed to satisfy their requirement, for taking reasonable care in your IR35 decision-making.
This is where you’ll really start to see the value of working with an IR35 specialist. They will want to review the contract(s) and begin by highlighting the positives, but they’ll also question you about the genuine working arrangements, to try and demonstrate that these support the contractual terms.
When this change in enquiry approach was introduced, our IR35 specialists found that a very detailed response to this letter had a one in three chance of closing the enquiry.
HMRC case officers now seem to have regressed to their old stubborn ways and rarely accept the response. Typically they’ll instead respond with a working practices questionnaire that can have 100+ questions and they’ll almost certainly want to approach the end client for their view.
Whilst this risks someone within the end client responding who has a limited understanding of IR35, or even the engagement that you were working on, the consultant should be able to challenge nonspecific responses from the end client. HMRC will be aware that if the case is going to tribunal, any inadequate fact finding from them will be exposed in court.
If HMRC do not accept the initial response, this can mark the start of a long battle, with correspondence being exchanged and HMRC calling for a meeting with you the contractor.
As contractors are not obliged to meet with HMRC, these meetings are usually declined. Being put in that kind of high-pressure environment, will likely be of no benefit to you.
Alternative Dispute Resolution (ADR)
In cases where the investigation cannot be resolved by correspondence and an impasse is reached, the next step can involve utilising HMRC’s ‘Alternative Dispute Resolution’ (ADR) service.
The service will allow you to discuss the case, face-to-face, with an independent HMRC mediator who is not dealing with your original case.
HMRC states on its website:
“ADR can be used before and after HMRC has issued a decision that can be appealed and at any stage of an enquiry, including:
• during a compliance check when you are unable to reach an agreement with HMRC, or where progress in the enquiry has stalled
• at the end of a compliance check, when a decision has been made that you can appeal against ADR does not affect your right to appeal, or to ask for a statutory review.
ADR does not affect your right to appeal, or to ask for a statutory review.”
Each ADR application that HMRC receive, is considered on a case by case basis. As it is not a statutory process, HMRC reserves the right to reject applications that they do not think are suitable for ADR.
Our IR35 tax specialists have effectively resolved several cases in this way, but the work involved is not too dissimilar to preparing for a First Tier Tax Tribunal. If ADR are unable resolve the issue, going to tribunal may be the only option.
We are proud to have an unrivalled track record of success in this area, including successfully representing the taxpayer in the first IR35 case Lime IT v Justin (2001), with many more victorious IR35 disputes won since then.
Going to Tribunal
It is only a taxpayer who can apply to go to tribunal, though HMRC can influence this by raising assessments that the taxpayer wants to appeal. Facing this alone, without professional representation, is risky business.
To gain a better understanding of how a tribunal hears a case, try reading a judgement. You’ll be surprised to hear that they’re not dry documents filled with legal jargon, but instead present a real understanding into the impressions that the legal teams, witnesses and taxpayer made on the judge.
The judgements normally adhere to a very clear format - a review of the contractual terms and the legal argument presented by both sides. Following the cross examination of witnesses for both parties, an attempt is made to understand the working practices of the engagement.
The judge then summarises the arguments and presents a conclusion which either allows the appeal (meaning the taxpayer has successfully overturned HMRC’s decision), or dismiss the appeal. In this worst-case scenario, HMRC will seek to collect the owed tax.
Even if things go in your favour and you win your appeal, the book may not be closed. HMRC might try to appeal to an Upper Tribunal or even to the Court of Appeal.
Reassuringly however, for it to go further than the First Tier Tribunal, there needs to be a significant point of law at stake or sufficient evidence to suggest that the Tribunal has made an incorrect decision.
Often, the First Tier Tribunal is the final part in the journey, and even then, very few cases make it that far.
As you can imagine, going to tribunal can be a stressful and costly ordeal. Taking out Fee Protection Insurance now can really make the world of difference if ever you find yourself facing an investigation, because by the time that check of Employer Records Letter lands in your post box, it might be too late.
How can we help?
At Markel, we offer practical and bespoke insurance solutions to achieve the best outcome from an HMRC enquiry.
Practices see us as much more than an insurer – they look to us for tax advice, legal advice and practical sensibly priced solutions.
Fee Protection Insurance
Fee protection insurance protects businesses and their advisers against an increasing number of HMRC enquiries. For your clients, HMRC investigations can prove a real headache. For your firm, an unexpectedly large bill can put a strain on a client relationship.
Our fee protection schemes provide access to an in-house tax and VAT helpline that handles over 50,000 calls a year, and over 60 tax specialists able to support you when defending an HMRC enquiry.
IR35 Contract Review
Our comprehensive review package fully analyses both the contractual terms and working practices of the engagement(s) using our tried and tested IR35 status questionnaire. Upon completion, clients receive a comprehensive report, including a “pass” or “fail”.
The review provides a specialist opinion as to the IR35 status of engagement, and recommendations to improve the contractual terms, so contractors can decide how best to be remunerated.