What to expect from an HMRC IR35 inspection

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What to expect from an HMRC IR35 inspection

It’s hard to say how many IR35 inspections HMRC undertakes each year, but figures place it between 250 -1000+.

If you need a refresher on what IR35 is and how it can affect you as an independent contractor, then everything you need to know can be found in our ‘Ultimate Guide to IR35

Being the target of an HMRC IR35 inspection can be stressful, but if you know what is required of you, it doesn’t have to be so scary.

First, let’s look at what can trigger an IR35 inspection:

  • You meet HMRC’s risk criteria
  • You’re at the centre of another HMRC investigation e.g. VAT, payroll
  • You work in a sector that HMRC has concerns about
  • You’re exhibiting behaviours that make HMRC suspicious of your IR35 status
  • You’ve been flagged by HMRC’s Transparent Benchmarking team – this team highlights companies whose profits / expenses vary significantly to the industry average

If you’re selected for an IR35 inspection, there’s a set procedure that you’ll go through.

How an HMRC IR35 inspection is carried out

The process starts with an unassuming letter from HMRC.

Titled, ‘Check of employer records’, the letter will explain that you’ve been chosen for an IR35 check. The letter will go onto to ask if ‘you’ve considered IR35, and if so, why you concluded you’re placed outside of IR35’.

Royal mail post box.

It’s important not to panic and rush-off a response. Instead, turn to your accountant for advice. They may be able to help you prepare a response or they can refer you to someone who can.

If HMRC decides that the evidence you’ve provided is satisfactory (providing a contract review for instance) they may decide not to take any further. But there’s always a strong chance they may wish to investigate it further.

If you have IR35 insurance, contact your insurer as soon as you receive the letter. Failing to do so may invalidate your policy. Your insurance company may also appoint a specialist to help you with the inspection.

Further action

HMRC may decide to investigate further if they feel you haven’t provided satisfactory evidence to support your decision.

This generally involves HMRC writing to your end-client to request a meeting. Your end-client doesn’t have to agree to a meeting, but it doesn’t help your case if they refuse.

It’s a good idea for you and your IR35 specialist to meet with your end-client before they meet with HMRC. This allows you to explain to them why HMRC wants a meeting.

Decision time

Man with pocket watch in hand looking at the time.

Following their fact-finding mission, HMRC will come to a decision. They’ll either conclude you were inside or outside of IR35.

If they decide that you’re outside, the inspection is closed in your favour. If they find you to be inside of IR35, the inspector will raise an assessment of NIC’s and tax due from your limited company. Penalties may also be added to this amount.

If you don’t agree with HMRC’s finding, you have 30 days to appeal their decision. This can take months, but if you’re looking for a quicker outcome you can use HMRC’s Alternative Dispute Resolution (ADR) process.

If you have any questions regarding an IR35 inspection, our Directors will be happy to cover these with you. Get in touch with us on 01962 867550 or send us a message via our website and a member of our team will be in touch.

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