Any contractor would find it unnerving to be a prospect of an IR35 investigation. Even if the taxes paid through their own limited company is in order, having to deal with HMRC investigators can consume one’s personal time and professional time as well as be a serious distraction. Even if a contractor is confident that he can prove himself to be truly self-employed, there are still risks that HMRC will not agree and demand ‘unpaid’ taxes and pay for these.
What is IR35?
IR35 is the legislation that HMRC utilizes to determine if a contractor is using self-employed status to illegally reduce their liabilities in tax. HMRC is concerned with contractors who are just disguised employees. They work as an employee for a company yet pay self-employed tax.
What is an IR35 investigation?
HMRC starts the investigation by sending a letter that states them checking a person’s tax records plus asking why a person considers himself self-employed. If HMRC does not agree with the explanation, they will conduct a detailed review. They will get evidence from the person in question and the client, as well as conduct a meeting with the person.
How many IR35 investigations are there?
Contractors must not be clouded with these IR35 investigations. There are many hundreds of UK personal service companies that are in operation. Only a few of these are chosen for IR35 investigations. There were 192 inquiries made in the 2013/14 fiscal year. This is 24% less than in 2012/13 and significantly less than ten years ago. During those times, HMRC was investigating an estimated 1,000 cases in 2003/04. However, even with the low number of investigations, the results of an investigation can be harsh with penalties of up to 100 percent of any unpaid taxes.
How to lessen the chances of being investigated by HMRC?
HMRC conducts IR35 investigations by randomly selecting companies and by searching for red flags that raise suspicion. These tax investigators search for evidence that points to a person effectively running their own business. Self-employed people claim expenses and deductions on the costs of running that business. Employees do not purchase equipment and materials. Thus, a limited company with low expenses, high dividends, and a low turnover has a greater probability of obtaining an IR35 investigation.
It is good to be prepared especially if one is chosen to be under an IR35 investigation. Having a contract in place that supports self-employed status, maintaining good records, and having the capacity to explain one’s working practices will help a person during these events.
If you are under an IR35 investigation, you can ask our experts for their technical expertise.