All you need to know about HMRC Investigations

It was confirmed on the 17th of October 2022 by the Chancellor of the Exchequer, Jeremy Hunt, that plans to repeal Chapter 10, ITEPA 2003 (more commonly known as IR35) have been scrapped. This means that End Hirers in the supply chain will continue to be responsible for assessing the employment status of their off-payroll workforce. This includes producing a Status Determination Statement and communicating this to the Fee Payer in the supply chain and to contractors operating through their own Personal Service Company.

It continues to be of the upmost importance for End Hirers to ensure they remain compliant to avoid both financial penalties and reputational damage. You can read more about the consequences of HMRC investigations here. This is particularly significant as there is no longer the 12 months grace period that HMRC implemented after the changes were first introduced which ensured that End-Hirers would not receive fines if they fell foul of the rules. Now that HMRC’s transition from education to enforcement is in place, it is expected that HMRC will be looking to conduct thorough IR35 investigations. It is widely reported that compliance checks are already underway in the financial services and oil and gas sectors.

What will an investigation entail?

It is important to note that any interaction with HMRC including other investigations, such as into VAT or payroll, could trigger an IR35 investigation.

An investigation will include assessing the processes and systems End Hirers have in place to conduct their employment status assessments. As a result, investigations can be a long and drawn-out process costing organisations unnecessary time and expense.

An End-Hirer will first be informed of an investigation by receiving a letter from HMRC. This illustrates that HMRC wants to understand an End-Hirer’s hiring process for contractors who work through a Personal Service Company, the processes for deciding employment status and the processes for deciding if any services End-Hirer’s outsource are fully contracted out.

If HMRC determine that the systems and processes are suitable, it is likely the compliance check will be closed, and no further action will be taken. This is due to the fact HMRC are likely to take the view that the risk of an End-Hirer not correctly applying the off-payroll rules is low.

Alternatively, if HMRC concludes that the systems and processes implemented by an End-Hirer are unsuitable, HMRC may need more information and evidence before drawing a final conclusion. In this instance, the investigation will progress and HMRC would seek to arrange a meeting at your premises which will involve a more detailed look at the processes you adopted as an organisation. They can ask for copies of all Status Determination Statements, before returning or asking for more information on processes and determinations. This often turns into a lengthy process which can run several years, and this is even before the case has been brought before a Court or Tribunal.

Where HMRC determines an End-Hirer has not paid the correct amount of tax, National Insurance Contributions or Apprenticeship Levy, this will need to be paid alongside any penalties and interest.

How far back can HMRC investigate?

HMRC can extend an enquiry back by 4 years for innocent mistakes, 6 years for carelessness and even 20 years where there is a belief that there has been fraudulent activity or tax avoidance.

How can Brookson Legal Services help?

Brookson Legal Services offer a mock investigation service. This entails a fictional scenario dealing with common types of IR35 and Fee Payer Investigations from HMRC. An End-Hirer will learn about the practicalities of an investigation or tribunal, how to put a case across effectively and the importance of being properly prepared. We also show End-Hirers how to avoid common mistakes which may cause an investigation or claim.

By engaging with an independent expert to carry out a mock investigation, your organisation can identify any issues so they can be resolved, leaving you confident in your IR35 solution.
If you have further questions or would like to embark on a mock investigation, Brookson Legal Services can help. Get in touch to speak to a specialist today.