HMRC has an ongoing programme of investigating contractors it suspects are working on contracts inside IR35. Contractors who have had an IR35 investigation and have been deemed to be working inside IR35 will receive a large bill from HMRC for back taxes, interest and penalties.
When a contractor receives written notice from HMRC about its decision, the result of the inspection and the consequences, including the tax bill, they will also be informed about what rights of appeal they might have.
In almost all cases, contractors will have the right to appeal against the HMRC ruling by applying to the First Tier Tribunal (Tax) to review their case. Under certain circumstances, especially with complex cases or those testing an important point of law, the case can be referred to the Upper Tribunal (Finance and Tax). These tax tribunals are independent of HMRC.
First-tier tax tribunal
The First-tier tax tribunal will be the first port of call for any contractor who wants to appeal against an HMRC IR35 decision. Ideally, a contractor should have IR35 tax investigation insurance that will pay for the costs of a professional adviser to assist with the case.
However, contractors can download an application form and complete an appeal themselves without a specialist adviser. However, this is not recommended, as the results of the Larkstar IR35 case clearly demonstrate.
Appeals that were before the Special Commissioners under the pre-April 2009 regime and not completed will be heard before the First-tier tax tribunal, which will have discretionary rules to ensure no appeal is disadvantaged because of the tribunal changes.
Appeals that were before the Special Commissioners under the pre-April 2009 regime and not completed will be heard before the First-tier tax tribunal, which will have discretionary rules to ensure no appeal is disadvantaged because of the tribunal changes
Depending on the nature and complexity of the appeal, one of four First-tier Tribunal categories will be allocated:
- Default paper
- Basic
- Standard
- Complex.
An IR35 appeal will almost certainly be placed into the complex category, as most IR35 cases require expert understanding of the issues. This adds weight to the argument that a contractor should have expert assistance with their IR35 appeal.
Upper Tribunal
IR35 appeals can be bumped up to the Upper Tribunal (Finance and Tax) if the contractor wishes to appeal against a decision of the First-tier tribunal or a point of law is being tested or challenged. Alternatively, if HMRC has lost in the First-tier, it may also apply to have a case heard in the Upper Tribunal.
In both cases, the Upper Tribunal is designed to hear appeals where it is thought that the First-tier was ‘wrong in law’. This might be where the correct law many not have been applied, where there was not enough evidence, or where the First-tier tribunal did not give adequate reasons for its ruling.
This tribunal is for serious cases that are highly complex and/or are testing major points of law. The Upper Tribunal is what is known as a Superior Court of Record and its judiciary are both High Court Judges and specialists in finance and tax.
Although the rules don’t require the contractor to have expert assistance, this is not a tribunal a contractor should expect to survive without very good professional assistance and representation.