There is a vast amount of information out there for protecting yourself from an IR35 enquiry – but what if, despite your best efforts, an enquiry against one of your contractors is launched. What should you, as a hiring manager, expect from the IR35 Enquiry Process?
What’s important to note here is that the rules for how IR35 will affect hiring managers is only something we will be 100% clear on come April 2020.
Until then we can only take lessons from HMRC’s approach to launching enquiries into the IR35 determination of contractors themselves.
With that in mind, we’ll be going through the IR35 enquiry process as it currently stands for contractors and how, if nothing was to change, a hiring manager might work through the IR35 Enquiry Process.
HMRC Letter Received
The IR35 enquiry process begins with what at first glance looks like an unremarkable letter from HMRC, titled ‘Check of employer records’. In it, they will state that they have selected your company for a ‘check’, but make no mention of IR35 until a later paragraph.
At this point, a well prepared Hiring Manager who has access to all of the Contractor’s relevant materials should be able to build a very strong reply with plenty of evidence to prove the status of their contractor will be able to nip this enquiry in the bud.
Unfortunately, the likelihood of HMRC backing off from an initial response is low and they will come back and want to dig deeper into the contractor’s IR35 position.
HMRC are able to request information relating to a contractor’s past, present, and future using ‘Schedule 36 Powers’.
Again, a hiring manager who has taken the due diligence to properly catalog their contractors will have a much easier time at this stage.
Is it possible to have an ‘IR35 Proof’ Contract?
There’s no such thing as an ‘IR35-proof’ contract. HMRC won’t just look at what’s written in the contract. They’ll look at the actual working relationship between you and the client. Each written contract will only be accepted as valid evidence if it accurately reflects the individual circumstances of the work engagement.
Your Response and Evidence Submitted
The next step of the IR35 enquiry process is the most important. Your response should be measured and considered.
It’s not advisable for a hiring manager or a company to handle an investigation without the guidance of a specialist. A specialist lawyer will be able to tell you which pieces of evidence you should be submitting, how to make your case stronger and how to avoid general pitfalls.
If either you or the contractor has some kind of IR35 insurance, it’s best for you to contact your provider before sending a response to the letter as they will want to handle negotiations and submissions of evidence from the outset.
The way the investigation is handled from the start is crucial, as a satisfactory response to the initial letter can close down an enquiry right away – making your life much easier.
Back and Forth
If HMRC do not accept the evidence you present in your initial response, they will want to carry out an in-depth review of your situation. This means analysing any written contracts, working practices and engaging with your end-user to try and find out the ‘true facts’.
If you used a recruitment agency to source the contractor then HMRC will want to look at the contract you have with the recruitment agency to ensure there are no discrepancies.
“One of the first things HMRC will want to do is meet with the contractor,” says Seb Maley from Qdos Contractor.
“Commonly it will be two compliance officers and they will be delving into the contractor’s actual working and business practices”.
“It is important to note that HMRC cannot demand a meeting and the contractor can request to deal with HMRC’s questions by correspondence. However, if you have an IR35 consultant acting on your behalf, a meeting is likely to significantly speed up the process”.
Once HMRC have spoken to all parties and seen all of the evidence they will make a final decision on the status of the contract. If they decide that it is outside IR35 then that’s the end of the investigation and both you and the contractor can get on with their lives.
If they say that the contractor is inside IR35 they will demand the end-user pays the retrospective PAYE tax and National Insurance, plus interest and a possible penalty.
Penalties and Sanctions
If your contractor is found to be within IR35 following an HMRC enquiry, the end-user will have to pay HMRC the tax and National Insurance contributions due, as well as any interest due on these amounts.
If the circumstances of your case show that you didn’t exercise reasonable care in completing your tax and National Insurance contributions returns you may also have to pay a penalty.
You can read more about reasonable care and what it means for Hiring Managers here.
The penalty will be a percentage of the tax and National Insurance contributions that HMRC would have lost if they hadn’t carried out their enquiry. The percentage is decided by looking at your behaviour – including whether or not inaccuracies in information you supplied to HMRC were deliberate or not. The penalties are applied in accordance with Schedule 24 of the Finance Act 2007.
Making the Process Easier – VenturiOPRaaS
Everything is easier with friends. Even IR35.
Some recruitment agencies will act as the end-user for their contractors meaning you won’t be responsible should something go wrong.
As for us, we are working closely with legal experts to ensure that any contracts we do operate are watertight and have developed our own tool to make determination of contractors easy.