How far back might HMRC go in an IR35 investigation?

The tax office can investigate as far back as 20 years

With most contractor news focused on the arrival of IR35 reform in the private sector, you could forgive independent workers for overlooking the fact that until the rules change, it is business as usual for HMRC.

When IR35 changes are enforced in the private sector on 6th April 2020, any liability as a result of an IR35 investigation - relating to income from April 2020 - will rest with the fee-payer. However, all liability resulting from tax periods prior to the reform will remain with the contractor.

For innocent errors and honest mistakes, HMRC can extend an enquiry as far back as 4 years. If a contractor has been noticeably careless however, this period can be increased to 6 years. Should HMRC consider there has been any fraudulent activity or deliberate tax avoidance, then the tax office can investigate as far back as 20 years.

These timescales not only demonstrate the importance of correct record keeping and tax return submission, but also the importance of considering IR35 compliance. As a contractor, you are expected to take reasonable care to ensure the records and information you keep are accurate, irrespective of whether you engage an accountant or not. 

Frustratingly, HMRC fails to define what it deems as ‘careless and or deliberate.’ That said, it is stated in HMRC’s own guidance that “the onus of proof of careless or deliberate behaviour is on HMRC” [CH54300]. This effectively means it’s up to the tax office to decide for itself.

A typical IR35 investigation can often take years to draw to a conclusion due to the time-consuming task of collecting the necessary information from all parties, including the end-client. And whilst it is HMRC’s responsibility to prove carelessness, it is imperative for a contractor to demonstrate they have considered IR35 compliance in order to avoid the extension of any investigation into previous years. 

This can be achieved by a contractor ensuring their contract is compliant via an IR35 contract review and making sure they are working compliantly in reality by discussing IR35 and their actual working practices with their client.

It is also advisable that contractors maintain IR35 insurance cover for retrospective years, just in case HMRC decides to journey back to previous contracts.

But what might trigger an IR35 investigation? Well, HMRC has always stipulated its enquiries are picked at random, which in theory means all contractors are at equal risk of an investigation. It remains to be seen whether this is in fact true or whether HMRC has its own criteria, such as errors on tax returns or anonymous tip-offs.

All individuals earning above the personal allowance (£12,500) in the UK are required to pay tax. This is usually done via PAYE, whereby tax is deducted by an employer and issued to HMRC on the individual’s behalf. For contractors operating through their own limited company, taxes are declared by submitting their annual Self-Assessment and or Corporation Tax return. If HMRC suspects there might be any errors or discrepancies, the taxman may launch an investigation.

There has been speculation in the past that the ‘tools’ HMRC provides to contractors to help set IR35 status, including CEST and HMRC’s contract review service, were implemented or at least subsequently used, to provide HMRC with information regarding contractors who should be operating as inside of IR35, prompting an increase in investigations. Predictably, HMRC has denied this is the case.

If you receive an IR35 enquiry letter from HMRC, which could be disguised as a ‘check of employer records’ letter, it’s important to seek help from an IR35 expert. Qdos Contractor’s tax team have been handling IR35 enquiries since the legislation was introduced in 2000. For assistance with an IR35 investigation, please get in touch on 0116 269 0999 or by emailing [email protected]