HMRC Enquiries - How do they start?

[GeekyGrandad]

From June 2011 IR35 forum - gives an idea of HMR&C thinking for the future:

IR35 National Compliance Unit
HMRC said that there was a need to be able to address wider low level risk by use of interventions other than traditional IR35 Reviews. HMRC described the role of this proposed Unit and how it might operate. If, for example, it was identified that there was a particular sector where there might be a problem about understanding IR35, HMRC could write to the parties involved informing them of the requirements of IR35 and where to get further advice. This could be backed up by providing additional publicity via the sector's representative bodies.

It was suggested that before targeted letters are issued, general guidance should be published. The view was expressed that HMRC needs to review its guidance which some feel is inadequate. HMRC committed to reviewing its guidance but emphasised that if there are perceived inadequacies, it is important that specific problems are brought to HMRC's attention.

IR35 Compliance Teams
HMRC explained that these teams would be responsible for compliance reviews of high risk cases. The IR35 teams would follow (as they do now) the same approach to compliance activity as in other areas to ensure consistency of practice. HMRC said that it welcomed feedback on their current operational compliance activity. It was obviously important that those who might be affected knew as soon as possible if IR35 was potentially applicable.

HMRC acknowledged that where a full compliance review is undertaken, the focus should be on concluding the review as quickly as possible. This is important both to minimise disruption to the taxpayer and to make the most effective use of HMRC's resources. HMRC is reviewing how compliance reviews are conducted and agreed that it was not acceptable for large numbers of questions to be automatically asked in every intervention.

HMRC were told that decisions on IR35 cases appeared to take a very long time. HMRC said that it had an interest in getting cases settled without delay, but it could only do this if it could obtain the necessary facts. Peculiar to IR35, as opposed to general status cases was the need to obtain facts from the end client. Improved guidance would hopefully speed up the resolution of such reviews by promoting transparency of process.

It was agreed that there are a number of detailed issues regarding how HMRC undertakes compliance activity and how it reaches decisions which will need to be explored as part of developing improvements in the way IR35 is administered.

IR35 Risk Assessment
HMRC explained that it was content to share details of its broad risk strategy but would not be able to share details of its specific risk profiling. HMRC further explained that its initial risk assessment eliminated certain kinds of cases, and that it critically assessed the rest before deciding if further action was necessary.

HMRC acknowledged that in the early years of IR35 it had adopted less refined selection criteria than used now. Processes for selecting IR35 cases had been improved. The proposed new strategy whereby low-mid risk would be addressed through interventions other than compliance reviews, should address the current position where because the only principal type of intervention is a review, lower risk cases have been the subject of a compliance review.

A lot of this information came out of PCG's input to the IR35 forum. HMRC will not disclose any criteria because it will give a clear way forward for avoiding IR35. Remember FUD (Fear, Uncertainty and Doubt) is HMRC's modus operandi so that there is suffiicient areas of grey for them to operate and "deem" as they feel like. They need the fear and uncertainty factors that results from the threat of a Tribunal.

[Greg@CapitalCity]

While inspections can be random, most often they are as a result of making an error in your PAYE/VAT/CT returns, or by not filing them in time, as stated by malvolio. I disagree that once they realise you are a one man band they kick into IR35 - unless of the course the tax inspector has a specific dislike of contractors The visits have been cross-discipline for several years now, and so long as the records are well kept, and reporting has been accurate, then that is usually the end of it.

With further cuts at the HMRC I simply don't think they have the manpower to ramp up investigations.

Because an investigation is often based on previous errors or omissions made, it stands to reason they often only occur after returns are submitted, and also a company with a short trading history has few errors to catch, and therefore tax to collect.

[GeekyGrandad]

While inspections can be random, most often they are as a result of making an error in your PAYE/VAT/CT returns, or by not filing them in time, as stated by malvolio. I disagree that once they realise you are a one man band they kick into IR35 - unless of the course the tax inspector has a specific dislike of contractors The visits have been cross-discipline for several years now, and so long as the records are well kept, and reporting has been accurate, then that is usually the end of it.

With further cuts at the HMRC I simply don't think they have the manpower to ramp up investigations.

Because an investigation is often based on previous errors or omissions made, it stands to reason they often only occur after returns are submitted, and also a company with a short trading history has few errors to catch, and therefore tax to collect.

They are not going to ramp up investigations per se . What ther are going to do is use their new system to create target lists from defined criteria. This criteria can be that indicated in your post but also criteria such as the IR35 specific questions on the P35, Companies House info e.g. one or two person companies, PAYE/dividend split payments, frequency of dividend payments e.g. "salary like", etc, etc

With the closer integration of their IT systems, targetting with whatever criteria they deem is possible.

[philip@wellwoodhoyle]

They are not going to ramp up investigations per se . What ther are going to do is use their new system to create target lists from defined criteria. This criteria can be that indicated in your post but also criteria such as the IR35 specific questions on the P35, Companies House info e.g. one or two person companies, PAYE/dividend split payments, frequency of dividend payments e.g. "salary like", etc, etc

With the closer integration of their IT systems, targetting with whatever criteria they deem is possible.

All true, but probably not much help to HMRC. Whatever "tools" they use to get their target list, it's still going to be huge and doesn't even begin to show which are likely to be caught by IR35 as there are plenty of IT contractors who are well out of it's clutches. I very much doubt that they'll simply start by selecting random "potential IR35 cases" from a list of tens of thousands of limited companies with just 1 or 2 director/shareholders with a trade classification of "consultant" - they'd be wasting so much time!

Same with S660 - plenty of legitimate husband/wife companies where both are working in the business - another huge list of tens of thousand of companies.

At best, they may start to use the new Xbrl tagging to try to select companies with few overheads compared to income or where there aren't the usual overheads of "proper" businesses such as advertising, staffing costs, goods for resale, etc.

But even then, it's needle in a haystack job, to try to hit a suitable target that will may within IR35 and even then, it's quite possible the contractor will have IR35-proof contract and working practices.

They'd be far more effective working backwards from the end client, i.e. find a big firm that takes on loads of contractors. Ask for a list of contractors. Ask for a sample contract and working practice details. Then if it looks like IR35 applies, just blanket everyone working for that big firm. I've heard of a few cases where they've done this kind of thing - not massive scale, but certainly where they've got a room-full of people doing the same work with the same contract - one down, all down!

[Fred Bloggs]

It's a common myth that there is an IR35 investigation process. Investigations start as a result of either some discrepancies in your PAYE-related filings to HMRC, a standard VAT inspection or as one of a random set kicked off each week. As soon as Hector notices you're a filthy one-man contractor, he will inevitably send in the IR35 questionaire.

So one trick is to make sure all your returns are accurate and consistent. Don't give them an excuse to look in the first place.

Good advice, my strategy exactly. I always make sure I pay everything a few days early too.

[zoomfwd]

I have just received a letter from HMRC which states

"Every year we check the records of a number of businesses to make sure they are accurate and that the businesses are paying the righ amount of Tax and National Insurance Constributions. We have now selected your business for a check, so I would like to visit your premises and look at your records. I will not be looking at all your records, just those that relate to determining whether the Intermediaries Legislation, popularly known as IR35, applies to an engagement or engagements"

They also want me to send copies of all contracts and sample invoices, timesheets to them within 14 days.

So, they are obviously starting directly with IR35. (Company being going 13 years and all accounts, vat etc always filed on time)

We know that there were only 20ish IT35 investigations last year but do we know how many checks of this nature there were ? (I'm assuming this isn't yet what was classified as an IR35 investigation)

[cojak]

Speak to your accountant immediately. See HMRC at your accountant's premises, not your own.

[malvolio]

Not a PCG member then? If you are, call the office and stand well back. If not, well it's too late now.

Don't send HMRC anything until you've got professional advice on what to do next. Hopefully you can head them off at the pass. If it all goes pear-shaped because you got a step wrong, you're looking at around £10ks of professional fees and a couple of years of worries, so be careful.

I'll flag the wording to the PCG team anyway. It is totally contrary to what we're being told is happening on the ground.

[Martin at NixonWilliams]

I have just received a letter from HMRC which states

"Every year we check the records of a number of businesses to make sure they are accurate and that the businesses are paying the righ amount of Tax and National Insurance Constributions. We have now selected your business for a check, so I would like to visit your premises and look at your records. I will not be looking at all your records, just those that relate to determining whether the Intermediaries Legislation, popularly known as IR35, applies to an engagement or engagements"

They also want me to send copies of all contracts and sample invoices, timesheets to them within 14 days.

So, they are obviously starting directly with IR35. (Company being going 13 years and all accounts, vat etc always filed on time)

We know that there were only 20ish IT35 investigations last year but do we know how many checks of this nature there were ? (I'm assuming this isn't yet what was classified as an IR35 investigation)

I agree with what others have said, speak to your accountant immediately about this and ensure all correspondence goes through them.

If you have IR35 insurance or a similar product (PCG springs to mind?) then speak to them immediately too.

This could be something that can be ended quite quickly with the correct professional advice, however, if it goes pear shaped it could be very costly depending on your exact circumstances.

Martin

[tarbera]

Depends

Speak to your accountant immediately. See HMRC at your accountant's premises, not your own.

If your Accountant is not up to speed on all things IR35 they may make things worse by landing you in it. !!!!


If you are a PCG member, give them a call then put your feet up and relax