IR35 risk with ignoring HMRC questionnaires, warns tax expert

HMRC tax investigations can be time-consuming and stressful. So what triggers an IR35 investigation? As we’ll hear, it’s often simply a lack of a response to a request for information sent by the Revenue, or a response which is sent but sets hares running.

A reminder. IR35 enquiries will seek to determine whether your determination of employment status for your contracts as being outside IR35 is correct. Responsibility for determining whether status as inside or outside IR35 now lies with the end-client but the Revenue has never publicised its approach to selecting enquiries. However, there is no doubt, end user engagers which are large businesses with a reputation to protect are certainly not immune. 

HMRC enquiries are typically lengthy and complex and every case is different but when they happen they are often highly technical and often take a very long time to conclude. However, we have noticed in the last year or two HMRC have upped their game, increased the resources of their investigation teams, and are asking ever more questions of end users. Often they start with a simple questionnaire which may well land on the desk of HR. So what if that happens? How should HR respond? Earlier I spoke to tax expert Penny Simmons to find out more. First question – is this a new thing?

Penny Simmons: “It's not a new thing. The Revenue, in all areas of tax legislation, may send businesses questionnaires, or letters, asking for information and asking businesses to provide answers about various areas of compliance. What we have seen in the last 12 to 18 months, particularly since the first year of compliance with the new IR35 rules, so that would be since April 2022, we have seen, increasingly, businesses receiving letters from the Revenue in all forms, asking for information about their IR35 compliance, but the letters are not necessarily saying we are looking into compliance with IR35. The letters may take the form of a simple questionnaire asking for the number of contractors that our business engages with who are engaged through their own personal service companies, and the amounts paid to those contractors. So, there is no template format for a letter of that type.”

Joe Glavina: “If a questionnaire is sent to a client, Penny, who in the business is likely to see it first? If it does come to HR what should they do with it?” 

Penny Simmons: “Very good questions Joe. The first thing to say is I would expect those questionnaires probably to go in the first instance to the HR team. They may well not go to the internal tax team if there is one, and the most likely recipient in the first instance is, probably, HR. The first thing that I would strongly recommend is that HR doesn't just respond but they get either their internal tax team, or an external adviser, to have a look at the letter, look at what they're asking for, and to take stock before they reply because it will be very important to make sure that you get the information correct and that you are aware of where these letters might lead because sometimes these letters, these questionnaires, are a precursor to a Revenue enquiry. So it is best to talk to people and that may well be a business's internal tax team or, like I said, external advisors before responding so you can get an idea as to what information you need to provide and what might happen after you have responded.”

Joe Glavina: “Of course, it’s possible that if the questionnaire goes to HR they might not realise its importance and they might not respond. So is that your message to HR professionals watching this? Don’t ignore it?”

Penny Simmons: “Absolutely, Joe. That is exactly the message I want to get across - don't feel the urge if it's sitting in your inbox to just get rid of it so you reply really quickly. Take stock, pause and speak to somebody with experience of responding to letters of that kind, or questionnaires of that kind, even if they may not have seen a letter or questionnaire directly relating to the IR35 rules. So the reality is that is either going to be the internal tax compliance team, or it's going to be an external adviser, and I would strongly recommend that some kind of advice, or pause, is taken before responding.”

Joe Glavina: “Finally Penny, are you seeing this happening right now? What are you seeing?” 

Penny Simmons: “Yes, Joe, this is happening and, as I've explained, it often happens because HR teams receive what looks like a simple questionnaire from the Revenue. I mean, literally a questionnaire with, maybe, two or three or four questions about their contractor population and it's badged as a questionnaire that's just kind of a way that the Revenue collects information, it is sent back and it leads to something else. The outcomes of those, if you like, enquiries in whichever form they take vary. So it's difficult really to give you a simple response to say, this is what happened and this was the outcome. But what we do know is that these questionnaires can grow legs and what starts as a questionnaire doesn't necessarily finish as a questionnaire. and that's why we are recommending that if HR professionals receive questionnaires about IR35 compliance, check it with their own internal tax compliance team, if they have one, or go and speak to an external adviser, somebody who has experience or responding to questionnaires and dealing with HMRC inquiries.”

So, if you do receive a questionnaire from the Revenue and you are unsure what to do then we strongly suggest you take legal advice because, as Penny says, it could lead to a full-scale enquiry which would be a big deal. Meanwhile, on the subject of IR35 the latest news is that the set-off new mechanism designed to avoid the double taxation issue which we’ve talked about a number of times in this programme, is going ahead from April 2024. So that’s a good news story. Last week Penny talked to this programme about that in ‘IR35 ‘double taxation’ to end from 6 April 2024’. That is available now for viewing from the Out-Law website and we’ve put a link to it in the transcript of this programme.

LINKS
- Link to HRNews programme: ‘IR35 ‘double taxation’ to end from 6 April 2024’