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Dealing with an IR35 Investigation
IR35 Investigations are a concern for many contractors who run or have run a Contractor Limited Company in the past (unless it was before the IR35 rules came in; 5 April 2000). The only way to completely avoid the prospect of an IR35 Investigation is to receive all contract income as employment income subject to income tax and class 1 national insurance deductions.If you are looking to remove any possible question of IR35 issues you may be best advised to use an Umbrella to deal with contract income. To find out more call Commonwealth Contractors now on 0800 294 4388 or Submit your details and we will get right back to you.
Why can IR35 Investigations be a problem?
The HM Revenue and Customs have the power to go back 6 years to investigate your tax affairs. If you are found to have been operating incompliantly at any time in that period you could face the prospect of repaying tax plus interest and late payment penalties. Few people put aside enough cash ‘for a rainy day’ to cover such a 6 year bill. If you run a Contractor Limited Company you should actively consider building up reserves to cover such possibilities.Even if an IR35 Investigation turns up nothing, the whole process can last for years and be a big hassle, and a professional distraction from running your business -, not to mention costly if you have to get professional advice or help fighting your case.
What precautions should I take?
To successfully defend yourself against IR35 you need to prove that you have been working as self employed when undertaking contracts in respect of which earnings dividends have been paid. To prove this you need to make sure that any contracts and working arrangements are outside the scope of IR35.Make sure that an IR35 assessment is undertaken on the contract and that revisions are made where required. You need to keep copies of all contracts you work further to for at least 6 years if not more. It is also important to ensure that actual working arrangements reflect contract terms and conditions. You may want to get a letter from the client confirming working arrangements (e.g. right to substitution, freedom to work from home, use of own computer equipment etc), send emails from your own computer etc
Reducing the chance of an IR35 Investigation
A full blown IR35 investigation will normally originate from a PAYE Investigation. The HM Revenue and Customs normally undertake PAYE Investigations every few years and although nothing can be done to avoid an Investigation, actions can be taken to reduce the frequency. You should make sure that you:- Submit PAYE documents to the HMRC on time (especially P35s and P11Ds)
- Ensure that documents are completed correctly. Blatant errors may cause the HMRC to think that everything is not quite right
What should I do if I am to receive a PAYE Investigation?
The HM Revenue and Customs will notify you of a PAYE Investigation in writing or will call to arrange a meeting. If you run your limited company from home it is recommended that you arrange the meeting at your accountant’s offices. Once the meeting has been arranged you will need to prepare all documents requested by the HMRC. Documents normally include:- Employee PAYE records
- End of year PAYE documents for all years
- Sales Invoices
- Expense Claims
- Client/Agency Contracts
Once the PAYE Investigation has taken place you will receive a letter explaining any further action to be taken (If at all). If they have found reason to question your self employed status on certain assignments you should get professional representation and dig out all contracts and documentary evidence to back up your claim of self employment.
