IR35: How likely am I to be investigated by HMRC?
It’s probably understating things to say that there’s a lot going on right now, and we certainly don’t want to give contractors yet another thing to worry about in 2020. However, it’s no secret that the government will want to be paid back somehow for the coronavirus financial support that’s been given out. Chancellor Rishi Sunak said as much himself back when lockdown was just beginning, when he intimated that the self-employed could expect tax rises in the future in return for claiming government help.
That said, a more direct – and much less unpopular – way to recoup this money would be for HMRC to crack down on compliance and claim unpaid taxes from contractors found to have been operating inside IR35. While we agree that anyone deliberately attempting to obfuscate their IR35 status in order to pay less than they owe should be challenged and made to pay, HMRC investigations can be worrying for the majority of contractors who haven’t done anything wrong.
What if I’ve made a mistake somewhere? What if HMRC interprets my working practices differently? What if my contract wording is off? All these worries creep in and can make it a stressful time. But what is the likelihood of actually being investigated for IR35 by HMRC?
HMRC investigations: the facts
Exactly how many IR35 investigations are carried out by HMRC every year is unknown. HMRC simply don’t disclose those details, However, they are committed to at least 250 annually, and it’s believed the actual figure could be as high as 1,000. This seems like a lot, but when you consider the number of self-employed individuals in the UK (latest ONS figures put it at 4.76 million), the unlikelihood becomes much clearer.
Even if you are unlucky enough to be investigated, there’s a strong chance that HMRC will find no wrongdoing and will close your case. And then even if they do suspect you of being inside IR35 and take you to a tribunal, the odds are still in your favour. Out of 19 cases since April 2010, HMRC have fully won only five of them. That’s a win rate of around 26% - not exactly conclusive. It’s important to remember, then, that even if HMRC do investigate you, and even if they do dispute your IR35 status, there’s still a good chance that any rulings will go in your favour.
Recent IR35 investigations
If you look at recent cases, it’s apparent that HMRC tend to chase what might be termed ‘big fish’. They heavily focus on broadcasting personalities such as Eamonn Holmes, Helen Fospero, Lorraine Kelly, Kaye Adams, Paul Hawksbee, and Christa Ackroyd. As was well publicised at the time, Holmes, Hawksbee and Ackroyd all lost their cases, owing tax bills of £250K, £140K, and £420K respectively. Fospero, Kelly and Adams all won their cases, avoiding bills of £80K, £1.2 million, and £125K. If HMRC had won all of those cases, that would have been a combined bill of £2.2 million.
Even the cases that don’t involve celebrities tend to focus on contractors who would have large tax bills, such as their case against Northern Lights Solutions Ltd, whose director owed an estimated £75K.
Somewhat understandably, HMRC’s interest tends to be in high profile, big ticket cases that will a) recoup a large sum of money if won, and b) will garner enough publicity to serve as an example and deterrent.
While that’s not to say that they wouldn’t pursue cases for smaller gains, it could be argued that it wouldn’t be worth their while to potentially lose a tribunal for a comparatively small figure.
What to do if an investigation is opened against you?
First of all, don’t panic. If you have IR35 insurance in place then you’ll have specialists at hand to defend you. If you don’t have insurance you’ll be able to hire a specialist at an hourly rate, although bear in mind your costs won’t be covered in this instance.
- HMRC will give you an initial notification of the investigation and let you know what they need from you
- Your representatives will make a response to HMRC
- If this doesn’t satisfy HMRC, then they will review your working practices in more detail. If they’re happy, they’ll close the investigation
- They will also look at your contract with your end client
- HMRC will then give you an initial decision
- You can then challenge the decision if you are not happy with it
- If this fails to persuade HMRC, they will issue you with a Warning Letter with a payment calculation
- They will then issue tax assessments
- You or your representatives should then request a review of HMRC’s decision
- At this point you have 30 days to lodge an appeal
- If you do this, the case will be escalated to first tier tribunal
- If this were not able to satisfy the parties involved, it could be escalated to the higher courts
- There will be a final decision where you will either be found inside or outside IR35
You can read more detail on each of these steps here.
Statistically, it’s highly unlikely that you’ll be selected for investigation. Usually there has to be some kind of anomaly in your tax returns for HMRC to target you. However, some people do just get unlucky and Rishi Sunak’s warnings about tax parity between the employed and self-employed after the issuing of coronavirus support perhaps increases the likelihood in coming months that little bit more.
For this reason, it’s wise to prepare yourself should you ever receive one of those unwelcome letters from HMRC. This can be best achieved by taking charge of your contracts and working practices to ensure you are indisputably outside IR35 (you should be doing this anyway in the lead up to IR35 reforms). In addition to this, you should purchase an appropriate IR35 insurance policy, such as Kingsbridge’s IR35 Protect to ensure you have the best possible defence, as well as your costs covered. The policy flexes too, so it will cover others in the supply chain after the 2021 reforms.
If you’d like to speak to an expert about IR35 Protect, give us a call on 01242 808740.