How to deal with an IR35 letter
Following HM Revenue & Customs’ publication of new guidance on IR35, and the announcement through the IR35 Forum that it has set up three specialist IR35 investigation teams, HMRC has started issuing the first enquiry letters.
Kate Cottrell, co-founder of employment status specialists Bauer & Cottrell, who is also a member of the IR35 Forum, actually suggested this new process to HMRC as a starting point in IR35 investigation cases. Here, exclusively for FreelanceUK, she offers the following tips on how freelance contractors and consultants can deal with the new process.
How will I know if this is an IR35 check?
The letters are titled “Check of employer records” and are issued from a central HMRC postal point so you will not be able to identify which of the three teams it came from. However it should be obvious that this is an IR35 check as the letter requires the following:
- A breakdown of the income shown in the accounts of your limited company to the end of the last accounting period; and
- Copies of all the contracts that gave rise to that income.
The HMRC letter then asks if you have considered “the possibility of the company” being subject to the IR35 legislation and if you have concluded that IR35 does not apply then “please explain to me the basis upon which you arrived at that conclusion”. HMRC then states that they are asking for this information to help them “to be fully aware of and understand any view you may hold on the application of the IR35 legislation.”
Will I have to attend a meeting with HMRC?
HMRC may still request a meeting with you - the letters state – “Following my review of the contracts and consideration of information provided I may need to arrange a meeting with you.” However, although HMRC holds significant powers now, they cannot compel you to attend a face-to-face meeting and answer questions.
Are these IR35 letters any better than the old IR35 investigation process?
Yes. Under the old system an IR35 investigation usually involved a full blown Employer Compliance Review which looked at everything and it was often not obvious that the main purpose of the review was to look at IR35. These new letters represent a real opportunity to explain your working practices, supporting contracts and any in-business features and, providing they do demonstrate an outside IR35 position, the investigation can be stopped in its tracks. With HMRC specialist teams handling the cases, we should see an end to years of uncertainty and hopefully the number of contentious Tribunal and Court cases should reduce. This process will also help HMRC to focus on the ‘high risk’ cases.
What should I do if I receive an IR35 letter?
If you have any sort of HMRC IR35 investigation insurance, or are covered for HMRC IR35 defence, you will need to contact your provider. You should also contact your accountant if you have one. HMRC appear to be giving people about a month to get the information together so there is enough time. Bear in mind though that some schemes only cover you, the freelancer/contractor, once an enquiry becomes a “dispute” so in the case of these letters you may not be covered. Those without cover should speak to their accountants and/or consider engaging IR35 specialists to handle your case. At Bauer and Cottrell, for example, we are covering our clients who have our Guardian annual contract review service free of charge. Even if you do not have formal IR35 cover, you may have free access to a legal helpline that provides IR35 advice and guidance.
I have always considered IR35, but should I now be worried?
It depends. If you or your adviser/accountant has looked at all your contracts and more importantly your working practices, and can show that the engagements are outside IR35, then there should be little to concern you. Composing a suitable response to HMRC should be straightforward and you will be able to provide written confirmation from your advisor showing how they reached their opinion on your IR35 status.
My advisor/accountant merely ‘looked’ at my contract, should I be worried?
Yes, an IR35 review that does not look in detail at your working practices is not worth the paper it is written on! You can have the most 'IR35-friendly' contract in the world but unless this reflects the reality of the relationship with the end-client it is meaningless, especially where the engagement is via an employment agency/business, where standard contracts are used.
I have never bothered about IR35, should I be worried?
More than likely, yes. IR35 has never before received such attention. It has been subject to a review and remains in place and with the creation of specialist HMRC investigation teams - there will be thousands more IR35 cases than we have seen for many years.
I have taken the new business entity tests and am low risk so am I OK?
No, not necessarily. The tests only show your level of risk of an HMRC investigation, they do not confirm your IR35 status. HMRC will still need to check your status and even though you are low risk, you may still have contracts that are inside IR35 and you should have declared these as inside IR35 and paid up.
Can I do anything now to prepare?
Yes there are lots of things you can do now even if you have never considered your IR35 status before.
- Find out about IR35 and check out HMRC’s new guidance
- Have your contracts and working practices reviewed by your accountant or a specialist. Most will review old as well as current engagements.
- If you have taken IR35 advice but have nothing in writing contact the reviewer and ask them to confirm their opinion in writing. Seek confirmation too that they also reviewed your working practices and ask them to put this in writing. Establish exactly how they will help you and what charges they will make to deal with the letter and the entire investigation process.
- If you have IR35 insurance or legal expenses insurance, check out the policy wording to see if you are covered for this new initial letter process.
- Due diligence – think about your contracts over the last year and currently. Make a note of the differences between client employees and freelance contractors. Consider seeking client confirmation of the day-to-day working practices. Are you confident that the client will support your view of your IR35 status?
Don’t panic. There is an enormous amount of information, guidance and support available relating to IR35, and much of it is available for free.