IR35 Investigation – what to do when HMRC come knocking.
Question. What should you do when HMRC decides to do an IR35 investigation on you?
You should avoid a face-to-face meeting with HMRC. There is no legal obligation on a contractor or their client to meet HMRC during its initial IR35 Investigation. There are a number of dangers to be aware of.
A Status Inspector’s line of questioning will often be leading. That is to say one which he presents in such a way that it suggests a certain answer to the respondent or which makes assumptions about facts not yet agreed..
An example of a typical leading question put by HMRC during an IR35 investigation is: ‘Can you undertake any of the duties from home’?
This assumes that the work you are undertaking constitutes ‘duties’. This terminology is more consistent with an employee role rather than a contractor service. The question also makes reference to the ‘contractor’s home’ rather than place of business.
Internal Employment Status Guidelines
Part of the problem lies in the fact that HMRC draw the questions from their internal employment status guidance. They prepared this in relation to actual employment status dealing with individual workers. So, some of the terminology is not appropriate when a limited company entity is in the chain.
Once a Status Inspector has his ‘foot in the door’ during an IR35 investigation, it can be difficult to keep control over both the scope of questions being asked and the overall time that the meeting takes.
It is also not uncommon for the final minutes of the meeting, as prepared by the Revenue, to constitute a record of HMRC’s interpretation of the responses rather than the actual stated facts.
Best Advice for IR35 Investigation
Best advice on an IR35 investigation is simple. Avoid a face-to-face meeting or even telephone conversations. Ensure that all questions raised and responses given are recorded by way of written correspondence. This provides an opportunity for the contractor or client to properly consider their IR35 investigation responses.
Admittedly this approach may delay matters. However, sometimes this delay allows a pause for reflection that results in a more accurate record of the working practices.
This is particularly important when HMRC is enquiring into engagements that have ended many months or even years ago. It is not reasonable to expect an accurate representation of the working practices from memory in a face-to-face meeting.
In any event, forewarned is forearmed. Your client should be notified in advance that some form of input from them is usually unavoidable at some stage in the IR35 investigation enquiry.
Corroborative Witness Statement
This could take the form of a corroborative witness statement agreed between yourself and an appropriate client representative actually during the engagement itself. This may be challenged by HMRC at some stage. However, it can prove a very useful starting point.
HMRC will often seek generic statements from larger corporate clients to ease their own administration.
This is usually sought from HR and can bear little or no resemblance to actual on-the-ground working practices for your particular engagement. However, the HMRC often relies on this in determining the ‘facts’ relating to client policies.
When legal firms are representing a contractor and seek to include client statements in our own submissions, HMRC will often take issue with the proposed client representative.
HMRC usually seeks input from the client’s HR/Procurement/Tax department, from parties that are senior enough to speak for the client. However, the most relevant and proximate witness is usually the person whom you deal with on a day-to-day basis, not always the same person.
In Event of an IR35 Investigation
In the event of an IR35 investigation, it is strategically important to have representatives ‘on-side’ within the client organisation that are both senior enough to speak for the client on matters of policy and proximate enough to the engagement to provide credible on-the-ground testimony.
Given the complex nature of the legislation itself, the relevant case law and the strategies employed by HMRC it is essential to seek advice and representation from a specialist IR35 investigation legal advisor.
This also ensures that both the contractor and client know the limitations of the Revenue’s statutory powers. HMRC itself will not usually make this clear on an IR35 investigation.