HMRC Investigation – What to expect if you are contacted?
Even before IR35 became a permanent fixture in the private sector, we always emphasised the importance of preparing for a HMRC investigation. With the IR35 soft landing ending over a year ago, HMRC has given businesses enough time to get their affairs in order and has now started contacting private sector businesses to talk about their IR35 process, in order to learn if they are compliant.
It was rumoured that the transport sector was going to be one of the first targeted and that looks to be correct. With a number of haulage and logistics firms across the UK, including one of our clients who is no longer being investigated, now finding HMRC letters landing on their desks.
To give businesses a better understanding of this process, we have shared an overview of what to expect if HMRC contact your business and more importantly, what you need to do.
The initial engagement
From examples we have seen so far, the investigation timeframes set by HMRC are tight right from the beginning with acknowledgement of receipt of the initial HMRC letter required in approximately 7 days, although the letter will specify the date you need to respond by. Within this letter will also be detail of what evidence and documentation you will need to provide as well as the tax year that the investigation is focused on.
From our current insight based on client experience, this could cover up to 10 areas including: the processes you have in place for off-payroll working; whether you engage with PSCs; and your visibility of information from intermediaries – agencies or labour providers – that are used.
Added to this, specific detail is likely to be requested surrounding the exact number of off-payroll workers engaged by the company, their IR35 status determination and details around engagement and the contracts in place with workers. You are also likely to be asked whether the Government’s CEST tool (Check Employment Status for Tax Liability) was used and if you believe any services were fully contracted out or exempt from IR35.
This is a lot of information to collate and typically HMRC provides a month (with a set deadline) to allow time for the data to be gathered. Although this may sound like a generous amount of time, it relies on businesses having evidence not only of IR35 status outcomes but also of the processes and procedures in place across the business to demonstrate compliance and ‘reasonable care’.
Following submission of all documentation requested, roughly a week later HMRC will set up an interview to ask questions on the information submitted and to outline whether the correct detail was shared.
Preparing for the interview
Typically hosted remotely, HMRC will use the hour-long interview to delve into the background and detail of the company’s IR35 processes, status determinations and evidence. This session is relatively short but is your opportunity to convince HMRC that you have a good understanding of your obligations and you have these in hand so it’s important to be prepared.
Types of questions that may be asked could be around policies and procedures – who wrote them, when they were issued, how many agency workers are engaged and the reasons why. You can also expect questions surrounding your use of the CEST tool or, if not used, how you determined IR35 status as well as what evidence you have to support the outcome.
For transportation businesses this is particularly important for any HGV drivers deemed outside IR35 as this directly conflicts with HMRC’s general guidance.
You need the right people
Due to the level of detail that the interview will go into, there’s no limit to the number of people that can join the meeting. This is vital for businesses where responsibility and insight on the IR35 process is spread amongst departments and teams, as you need to have the right people on the line. This can help prevent simple mistakes and ensure that questions are answered correctly and in detail. It will also prevent responses of ‘I don’t know’ which can trigger a second interview session with HMRC.
After the interview, you can expect to hear back from HMRC with the outcome via a letter within two weeks. This will outline whether any further action (such as follow up meetings or additional documents to be supplied) is required or if you’ve been found compliant based on the information supplied.
Preparing for a potential HMRC investigation into your company’s IR35 compliance can be stressful, particularly if the responsibility and evidence is spread out amongst the business. But, by putting it off, there is a real risk HMRC could knock on the door before you’re ready.
Now is the time to seek expert guidance and support to collate the correct information and run a mock audit to help identify – and importantly address – any potential problem areas. This will not only help ensure compliance but also confidence and familiarity with HMRC’s processes should you be investigated.