How to prepare your business for an IR35 civil investigation

Despite best efforts to ensure that your business is compliant with IR35 legislation, HMRC may still  open an investigation.

If you receive notification of an investigation , it is important not to panic.

Being prepared can make the process less stressful and increase the chances of a satisfactory outcome.

What is IR35?

IR35 refers to two sets of tax legislation that are designed to combat tax avoidance by both workers and the firms that hire them.

The workers will be supplying their services to a company through an intermediary, such as a limited company, who would otherwise be a direct employee of the company.

The intermediary may be a Personal Services Company (‘PSC’).

A PSC is a company where there is a single employee or office holder, and the purpose of the PSC is to supply that individual’s services to a business.

The fee for those services is then paid by the business to the PSC.

The individual contractor is protected by the limited liability status of a company, giving them tax savings and more flexibility as to how profits are withdrawn from the company.

There are tax savings for a business that uses the services of a contractor via a PSC.

There is no need to deduct tax from payments made to the PSC, and they don’t have to pay employer’s National Insurance contributions (‘NICs’).

As NICs are currently payable at 13.8 per cent, not being liable represents a considerable saving on payroll costs. 

However, if someone operating through a PSC is deemed an employee the business using their services will become liable for NICs.

These contractors are called ‘deemed employees’ by HMRC, and they will be liable for the same levels of tax and national insurance (NI) as if they were employed through the PAYE scheme.

IR35 came into force in 2000 and has been heavily criticised by the business community for being badly conceived and poorly implemented.

A change to IR35 was implemented in 2017 across the public sector and commenced in the private sector in April 2021.

IR35 and Off-Payroll

HMRC has billed Off-Payroll as changes to IR35.

It is, in fact, a separate piece of tax legislation.

The new Off-Payroll tax introduces a different set of tax treatment, while retaining “deemed employment” status with the existing IR35 legislation.

The new rules mean that firms will be required to pay employment taxes on top of the fees paid to the contractor. 

These new rules will mean that employers will be liable for determining the tax status of individuals who they employ through PSCs.

What type of companies can it apply to?

Any company that makes use of contractors via PSCs could find that IR35 applies to them. They are particularly common in industries such as IT, construction and even the legal profession. HMRC is paying particular attention to fields where their use is commonplace.

What employers can do

If you engage with self-employed contractors, there are several steps you can take to ensure that you have everything at hand in the event of an investigation:

• Identify and review all of your contractor relationships
• Ensure that your terms of engagement with contractors are clear and reflect their true employment status
• Consider how these services are delivered and by whom. Could contractors or consultants be changed to employees, perhaps with zero-hour contracts, or casual worker agreements? Gaps between engagements would avoid continuity of service.

Consider all of your engagements with self-employed contractors and be willing to ask questions, if necessary, about how they manage their tax affairs.

Transparency can help to minimise the risk of confusion.

HMRC IR35 Investigations

HMRC can open an investigation into anyone who they believe has not been paying the correct taxes.

These investigations tend to be based on a risk assessment basis.

Investigations can take place into the tax affairs of contractors, and the companies who use their services.

If your company makes use of contractors, then you may at some point attract the interest of the HMRC.

Although HMRC are particularly interested in contractors who make use of PSCs to benefit from the tax system, the consequences of them deciding that a contractor is inside IR35 will be felt by anyone who uses their services.

Investigations can go back 20 years, meaning that substantial amounts of unpaid NI and PAYE can become liable.

If your company has been using a contractor who has been found to fall within IR35, it may then lead to a general investigation into the rest of your contractors.

What should you do if you receive notification of an investigation?

Assess your current  tax compliance and consider whether advice is required to revise your current policies in respect of IR35.

Before a potential investigation begins, instruct a tax specialist to review any contracts and agreements with contractors.

Consideration should be given to the clarity of the policies and whether there are any grey areas that could be of interest to the HMRC? If HMRC request a face-to-face meeting you should instruct a solicitor who specialises in tax investigations who will act on behalf your company and insist that discussions take place in writing in the first instance.

This allows you to give more considered responses and to take legal advice before responses are made.

Before you begin engaging with HMRC, you should seek legal and financial advice.

This will help ensure that you do not inadvertently increase the interest of the HMRC and make a resolution more difficult.

Jeremy Gordon can provide professional advice regarding IR35, Off-Payroll and your rights and responsibilities.

If you would like advice about how best to avoid attracting the interest of HMRC, or how to respond to a potential investigation, then contact us today for confidential advice.