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When HM Revenue and customs will open an enquiry

HM Revenue and Customs (HMRC) uses a risk-based approach to decide if they will open an enquiry to determine if IR35 applies to you. Where an enquiry is ongoing, HMRC accepts that facts may emerge at any stage to demonstrate that IR35 doesn鈥檛 apply.

Until 5 April 2015, you can self-assess your risk by using the HMRC business entity tests and scenarios. If the test places you in the low risk band this result can help resolve an IR35 enquiry. If asked, you should show HMRC your evidence for this test result. If you demonstrate to HMRC鈥檚 satisfaction based on the business entity tests that you鈥檙e outside IR35 or in the low risk band, then they will close their IR35 enquiry. HMRC won鈥檛 check again whether IR35 applies to you for the next 3 years as long as:

• the information you鈥檝e given HMRC is accurate
• your circumstances - in particular your working arrangements - don鈥檛 change in that time

The IR35 enquiry process

When HMRC opens an enquiry into your company or business, you鈥檒l get a letter asking you to:

• explain why you鈥檝e decided IR35 doesn鈥檛 apply to you
• give a breakdown of your limited company or partnership鈥檚 income for a particular year
• provide copies of all your written contracts for work during the specified year

If you respond with adequate evidence to show you鈥檙e not within IR35, HMRC will close the enquiry.

If after examining the written contracts HMRC thinks that IR35 may apply, they鈥檒l send another letter asking for a face-to-face meeting with you, as the director of your company or as a member of your partnership.

By accepting HMRC鈥檚 invitation for a face-to-face meeting:

• the enquiry can usually be concluded more quickly
• questions from HMRC can be answered immediately in the meeting
• you have the opportunity to talk to HMRC, clarify exactly what IR35 is and means, and ask any questions that you have

If you don鈥檛 accept HMRC鈥檚 invitation for a face-to-face meeting, HMRC will carry on with their enquiry by writing to you.

If necessary HMRC will use notices to obtain relevant information for their enquiry from you.

During the enquiry, HMRC will consider the contract(s) that govern the relationship between the worker and the client. It鈥檚 important to consider the actual working relationship, rather than just what鈥檚 written in the contract. There are special rules if you鈥檙e providing your services to the client as an office-holder or to perform the duties of an office-holder.

HMRC will look at the written contracts between the intermediary and the client to see if the terms and conditions show whether it falls within IR35. If there鈥檚 an employment business or agency involved, they will look at the written contract between the agency and the intermediary, and also the contract between the agency and the client.

HMRC will also look at how the terms and conditions of the contracts are put into practice to see if they accurately reflect the reality of the way in which you鈥檙e working.

HMRC will examine any evidence you have to support the written contractual terms and conditions. They鈥檒l consider all relevant contracts, supporting documents and evidence. This includes any contracts between the client and any agency or employment business involved in the arrangements. For IR35 purposes, these are known as third party contracts.

Third party contracts

A third party contract is a contract that you鈥檙e not directly a party to. For example, if you have a service company to provide your services and that service company uses an agency to find clients, then the contract between the agency and the client will be a third party contract. It鈥檚 also known as an 鈥楿pper Level Contract鈥�.

The way in which you work for your client determines whether or not a particular engagement falls within IR35. The third party contract is important because it details the client鈥檚 expectations of you as the worker.

If you鈥檙e unable to provide third party contracts then you should ask the relevant party to send a copy direct to HMRC, noting on whose behalf it鈥檚 been sent and why. HMRC won鈥檛 share this written contract with other HMRC or government business areas unless it鈥檚 for legal reasons. For example, in a Tax Tribunal.

鈥业搁35-辫谤辞辞蹿鈥檆辞苍迟谤补肠迟蝉

There鈥檚 no such thing as an 鈥業R35-proof鈥� contract. HMRC won鈥檛 just look at what鈥檚 written in the contract. They鈥檒l 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.

HMRC opinion on whether IR35 applies

Once HMRC has finished their enquiry, they鈥檒l issue you with an opinion on whether IR35 applies to you. If you disagree with this opinion, you have the right to object and explain why. If HMRC doesn鈥檛 agree with your objection, they鈥檒l issue a decision. You have the right to formally appeal against this decision.

You can appeal directly to a Tax Tribunal. Alternatively you can ask for the case to be initially considered by HMRC staff from its reviews and appeals team who won鈥檛 have been involved in the case before. If the HMRC reviews and appeals team conclude that IR35 applies, but you don鈥檛 agree with their decision, you can still then appeal to the Tax Tribunal.

As with other tax appeals, if you don鈥檛 agree with the tribunal鈥檚 decision, then you have the right to ask that the higher Courts consider your appeal.

Penalties and sanctions

If you鈥檙e found to be within IR35 following an HMRC enquiry, you must 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鈥檛 exercise reasonable care in completing your tax and National Insurance contributions returns you may also have to pay a penalty.

The penalty will be a percentage of the tax and National Insurance contributions that HMRC would have lost if they hadn鈥檛 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 .