The best time to prepare for an IR35 tax investigation is before you start every contract
Here are the key steps to preparing an IR35 defence that every contractor should take before starting a new contract.
Step 1 – check the contract
HMRC will consider the notional contract and the contractors working conditions, to establish the real relationship between the contractor and the client. The "notional contract" is one created by essentially tearing up any existing paperwork and then forming a new one based on looking at the actual relationship.
Because HMRC and judges can entirely override any written agreement, especially since the Autoclenz case, it is vital that the contractor starts by getting an assessment of all these factors before starting the the contract. Just focusing on the paperwork is not enough.
IR35 reviews used to be expensive and run into hundreds of pounds, but in February 2017 ContractorCalculator released a new artifical intelligence system that can now offer an IR35 reviews for free - called IR35Shield.co.uk. The system was developed over 7 years, asks 101 questions, and accurately models the decisions of actual judges - it gives the same answers as all 21 IR35 court cases.
AI technology has now fully entered the legal arena. There are now no barriers at all to contractors seeking professional opinions. Using IR35 Shield, you can get an assessment in 15 minutes.
Step 2 – manage the client’s expectations
Many clients simply do not know what IR35 means, or choose to ignore it. Contractors should speak to their main contact with the client and explain to them about substitution and control; in other words, how and when the contractor performs their duties.
Ideally the contractor should establish how they will work in writing, by using a Confirmation of Arrangements and getting the client to sign it. Contractors who use IR35Shield.co.uk can print one of these off.
Ideally the contractor should have this written confirmation in place when the contract starts.
Step 3 – get insured
For a variety of reasons, not least to demonstrate they are outside IR35, contractors should ensure they have the right insurances in place.
Contractor insurances such as Public Liability Insurance (PLI) and Professional Indemnity insurance (PI), demonstrate that a contractor is in business in their own right and has a financial risk. If there is no risk, then why insure?
PI and PLI are a must for contractors, and they do not have to be too expensive.
Maintaining PLI and PI is another tool to demonstrate financial risk and therefore help a contractor provide their status as being outside of IR35.
Another insurance to consider is IR35 insurance cover. This will pay for expert IR35 assistance should HMRC decide to start an investigation into a contractor’s affairs.
Step 4 – keep accurate records
Should the worst happen and HMRC start an investigation, then comprehensive, well organised and accurate business records could make the difference between winning and losing a case.
Keep a record of each separate contract and schedules for each different project going back six years.
HMRC will look for every opportunity to justify its inspection by claiming back-taxes, National Insurance Contributions and penalties, so the taxman will want to go through the contractor’s trading history in detail.
Step 5 – put the defence into action
If contacted by HMRC about an inspection, contractors are advised not to speak to HMRC or contact them in any way. If the contractor has Tax Enquiry Insurance, they should get in touch with their insurer immediately.
Ideally, all contact with HMRC should be through the contractor’s accountant or approved advisor. Personal contact could jeopardise not only the chances of successfully defending the inspection, but also a contractor’s insurance cover.
If the contractor has followed all the steps then their advisor will only need to collate all the information and send it to HMRC. Thousands of contractors have been successfully defended in IR35 enquiries, largely because of pre-empting HMRC’s requirements before they are formally requested.
As for contractors wishing to ‘go it alone’, it's not a good idea at all. With an investigation by HMRC, you are presumed to be guilty and have to prove your innocence. Even a chance remark to what sounds like a friendly enquiry from a tax inspector can become the basis of a strong case against you.
However, if you follow the steps outlined above you’ll be in a good position to fight your case.