How to prepare for an ir35 investigation

Understanding IR35 Investigations: How to Prepare

Navigating the complexities of an IR35 investigation can be a daunting experience for contractors and businesses alike. The UK government’s off-payroll working rules, commonly referred to as IR35, are designed to prevent tax avoidance by ensuring that individuals who work like employees, but operate through their own limited companies, pay the same Income Tax and National Insurance contributions as regular employees. If you are subject to an IR35 investigation, it’s essential to be well-prepared. This article will guide you through the steps to take before, during, and after an investigation.

What is an IR35 Investigation?

An IR35 investigation is conducted by HM Revenue & Customs (HMRC) to determine whether a contractor is genuinely self-employed or should be classified as an employee for tax purposes. The investigation can be initiated for various reasons, including a random selection or due to certain risk factors that may have raised concerns with HMRC.

If HMRC determines that you are inside IR35, meaning you are operating as a disguised employee, you could be liable for additional tax and National Insurance contributions, along with interest and possible penalties. Therefore, it’s crucial to take the investigation seriously and prepare thoroughly.

Steps to Prepare for an IR35 Investigation

1. Review Your Contractual Agreements

The first step in preparing for an IR35 investigation is to review your contracts. HMRC will scrutinise your contractual terms to assess whether you are genuinely operating as a self-employed contractor. Key factors that HMRC will consider include:

• Control: Who has control over how, when, and where the work is performed? The more control the client has, the more likely you are to be considered an employee.
• Substitution: Are you required to personally perform the work, or can you send a substitute in your place? The right to substitute someone else to complete the work is a strong indicator of self-employment.
• Mutuality of Obligation (MOO): Does your client have an obligation to provide you with work, and are you obligated to accept it? If there is a continuous expectation of work, it suggests an employment relationship.

It’s essential to ensure that your contract accurately reflects your working practices. If there are discrepancies between the contract and the reality of your working arrangement, this could raise red flags during the investigation.

2. Maintain Clear Records of Your Working Practices

In addition to reviewing your contracts, you should maintain detailed records of your actual working practices. HMRC will not only look at your contractual agreements but will also assess how you operate day-to-day.

Some areas to document include:

• Working hours and location: Do you have the flexibility to set your own hours and choose where you work?
• Client relationships: Are you working for multiple clients, or are you dependent on one client for the majority of your income?
• Provision of equipment: Are you using your own tools and equipment, or does your client provide everything you need to perform your work?

Maintaining clear documentation of your working practices can provide valuable evidence to support your case during an investigation.

3. Seek Professional Advice

IR35 legislation is notoriously complex, and the consequences of being caught inside IR35 can be financially damaging. Seeking professional advice from a tax advisor or accountant with expertise in IR35 is a wise step. A professional can help you assess your IR35 status, review your contracts, and provide guidance on how to handle the investigation.

In some cases, you may also want to consider obtaining a formal IR35 status review from a specialist. This can provide an additional layer of protection and may be useful if you are asked to demonstrate your compliance with IR35 during an investigation.

4. Respond Promptly to HMRC Requests

If you receive a notice from HMRC that you are being investigated under IR35, it’s important to respond promptly. Ignoring the investigation or delaying your response can lead to further complications. HMRC will typically request documentation, such as contracts, invoices, and evidence of your working practices.

You should ensure that all requested information is provided in a timely manner and that your responses are clear and accurate. If you are unsure about how to respond to specific queries, it’s advisable to consult with your tax advisor before submitting any documentation.

5. Be Prepared for the Outcome

Once the investigation is complete, HMRC will issue a decision on your IR35 status. If you are found to be inside IR35, you may be required to pay additional tax and National Insurance contributions. However, it’s important to remember that you have the right to appeal HMRC’s decision if you believe it is incorrect.

If you decide to appeal, you will need to provide evidence to support your case. This could include additional documentation, witness statements, or expert testimony. Again, seeking professional advice during the appeals process is highly recommended.

Avoiding Future IR35 Investigations

While it’s impossible to guarantee that you won’t be subject to future IR35 investigations, there are steps you can take to minimise the risk:

• Ensure your contracts are reviewed regularly by an IR35 specialist to ensure they reflect your working practices and are compliant with current legislation.
• Consider working with multiple clients to demonstrate that you are not reliant on a single source of income.
• Keep thorough records of your work, including timesheets, emails, and correspondence with clients, to provide evidence of your self-employment status.
• Use the CEST (Check Employment Status for Tax) tool provided by HMRC to assess your employment status. However, be aware that the tool has faced criticism for inaccuracies, so it’s best to use it in conjunction with professional advice.

Conclusion

Preparing for an IR35 investigation requires careful planning and attention to detail. By reviewing your contracts, maintaining accurate records of your working practices, and seeking professional advice, you can significantly improve your chances of a favourable outcome. Remember that being proactive is key – the more prepared you are, the more effectively you can navigate the complexities of an IR35 investigation.