How can I avoid an IR35 tax investigation by HMRC?
It’s understandable that, as a contractor, the last thing you want is to be investigated by HMRC for IR35. We’re sure you’ve read the headlines and seen what happens to people found on the wrong side of the legislation – it can result in hefty pay-outs! While under the reformed IR35 rules, it is your fee-payer and/or end client who holds the tax liability, there are still certain situations when you, the contractor, are the one liable – such as when your client qualifies as a small business.
Technically, of course, you can’t ‘avoid’ being investigated by HMRC. If they think your tax affairs should be looked into then they’re going to look into them. However, there are things you can do to ensure there is no reason for HMRC to investigate you and, if they do, that you can prove you are in the right – which largely hinges on you being on the correct side of the rules and remaining compliant at all times.
Why would I be investigated by HMRC?
There are a number of reasons why HMRC might decide to launch an IR35 investigation against you as a contractor. Whilst some may indicate wrongdoing, not all of them do. Reasons include:
- HMRC believe you have made a mistake. This is where HMRC believe you may not have fully understood how the rules apply to your tax situation, or you have made a genuine error.
- Information from a source or whistle-blower. In this situation, HMRC will have been informed by an anonymous source or whistle-blower that there is reason to believe you are acting as a ‘disguised employee’ for your client, whether intentionally or unintentionally.
- HMRC believe you have been dishonest. This is where HMRC believes you have actively set out to mislead them about your tax status and, as such, have provided false information.
- You could be the subject of a random check. Random checks do happen and it could just be that you get caught up in one. HMRC has been known to target some industries more than others with these. These are usually industries with a high proportion of limited company contractors, such as broadcasting.
When the new IR35 legislation came into effect in April 2021, we entered a ‘soft landing’ period of 12 months to give businesses a chance to catch up with the new rules. This is now over so we may well see HMRC get tougher with investigations over the coming months, which could mean more random checks on their part.
Ensure you are working compliantly
It should go without saying, but ensuring you are working compliantly is the best thing you can do to avoid an IR35 investigation by HMRC. This means following the letter of the law, declaring your IR35 status accurately and honestly, and ensuring your contracts and working practices reflect the reality of your situation. In order to fully understand the ins and outs of IR35, and the markers that show whether you sit ‘inside’ or ‘outside’ of the legislation, you should take a look at the IR35 section of the Kingsbridge Knowledge Hub, which has answers to pretty much any off-payroll working question you could muster.
Understanding the rules thoroughly – and complying with them – means that should you find yourself being investigated, you can show definitively that you have done nothing wrong.
How Kingsbridge can help
Kingsbridge can help you when it comes to IR35 investigations by way of our IR35 Protect insurance. The unique cover flexes to cover whoever holds the tax liability for any given engagement, whether that’s you, your recruiter, agency, or your end client, thus removing some of your riskiness as far as IR35 is concerned and making you a more attractive hire.
Also incorporating our standard legal expenses cover, the IR35 Protect Essential package includes:
- £100,000 of cover for taxes, interest and penalties from HMRC arising from an investigation
- £100,000 of cover for IR35 status enquiry defence costs
- Legal expenses for tax, VAT, PAYE and NIC investigations
- Contract dispute cover
- Jury attendance cover
- Debt recovery
- Identity theft cover
- Personal injury cover
What’s more, Kingsbridge also guarantee that your HMRC investigation will be defended if you hold our insurance and your outside IR35 status has been determined using The Kingsbridge IR35 Status Tool or by one of our approved panel members. This gives tremendous peace of mind, knowing you won’t be alone in the face of an investigation. And if you opt for the IR35 Protect Premium Cover, it includes all of the above plus unlimited reviews by The Kingsbridge IR35 Status Tool to determine your status for any and all of your engagements for the duration of the policy.