How the HMRC IR35 investigation process works

If you are a contractor, chances are you will have heard of IR35 – the Intermediaries Legislation. The rules, which have been in operation since 2000, seek to penalise so-called ‘disguised employees’ – those who work via their own company, but actually work in the same way as traditional employees.

As a result, many readers may be wondering what an IR35 enquiry actually involves.

Here, Seb Maley from Qdos Contractor, explains how the Employer Compliance Review process typically works.

Employer Compliance Reviews and IR35 enquiries

Historically many IR35 enquiries have originated from Employer Compliance Reviews (ECR), which is a routine inspection of a company’s PAYE affairs.

With contractors, HMRC used to use them as a ‘foot in the door’ to pursue IR35 matters. The officers undertaking the initial review would often gather basic information about the contractor’s engagements and then pass it over to a specialist status inspector to deal with from there.

Following the changes to the way IR35 is administered, HMRC are now more direct with letters informing contractors of an impending IR35 review (an enquiry by any other name), bypassing the ECR route.

At the start of each review, HMRC will ask ‘Have you considered IR35? If so why do you consider yourself to be outside of IR35? Please provide evidence to support this answer’.

This evidence will include details of the contractor’s previous engagements; the names of end clients, agencies and contract dates and details of actual working practices.

If the evidence is unsatisfactory or HMRC feel they need to test it, they are likely to want to speak to the end-user themselves to get their view on how the contractor worked and was treated in reality. If this is unsupervised you could be leaving yourself exposed.

HMRC will also not be slow to use their statutory powers of enquiry to extract information should the need arise.

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Qdos’ Tax Liability Cover (TLC35) insurance covers all representation in respect of any HMRC review or enquiry and also covers all resultant tax, interest and penalties.

You can find out more here.

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Last updated: 15th June 2019