How far can HMRC go back in the event of an IR35 investigation?
If you’re a contractor operating under a Personal Service Company (PSC) you’ll probably be aware that, from April 2020, medium and large sized end-clients in the private sector will become responsible for determining your employment status, with fee-payers also taking on liability for issues resulting from tax investigations from that date.
For IR35 investigations covering periods prior to April 2020, however, you’ll still be liable for any tax or National Insurance that HMRC believe are owed. So can IR35 be backdated, and if so, how far?
How far back can HMRC go for IR35?
HMRC has the power to go as far back as 20 years in an IR35 investigation if they believe fraud has been committed, or deliberate tax avoidance. If during the course of an investigation HMRC consider the error(s) to be honest mistakes, they’re likely to go back four years.
This can increase to six years if they attribute the errors to carelessness, however, such as making the same mistakes repeatedly. The IR35 investigation time limit is ‘behaviour’ dependent in that they try to identify the cause of the errors and any motives behind them.
What triggers an IR35 tax investigation?
HMRC randomly select Personal Service Companies, but there are certain factors that can trigger an IR35 investigation. These include:
- Taking a high amount of dividends, but operating with relatively few expenses and a low turnover
- Being unable to adequately explain your working practices as a contractor
- Not having a contract in place
- Failing to keep proper records
- Making repeated mistakes in your tax returns
HMRC will expect to see the typical deductions and expenses claimed in self-employment - in other words, expenses that employees don’t have to pay.
How do you know if HMRC are investigating you?
HMRC will inform you by post of a potential tax investigation, but the letter you receive may be entitled ‘Check of Employer Records.’ They’ll ask you to explain why you fall outside of the IR35 legislation in the tax years targeted, request details of your income during these years, and also copies of your work contracts.
If HMRC aren’t satisfied that all is in order they’ll commence an investigation into your employment status and tax affairs. They may require information from your end-clients, and are also likely to request a face-to-face meeting with you to discuss the issue.
Professional assistance for IR35 investigations
Given the fact that HMRC can go back 20 years in an IR35 investigation in some instances, it’s crucial that you seek professional assistance when answering their questions. The initial reference to your views on your application of IR35 rules in the past is particularly important.
Answering in the wrong way, however innocently, can create further issues and suspicions on their part, and further lengthen their investigations. If you don’t currently have an accountant to help you, Handpicked Accountants can make sure you have access to qualified accountancy support in your area.
We make recommendations based on our longstanding knowledge of accountants’ working practices and qualifications – please call to find out more.