Treat IR35 enquiry letters from HMRC as a priority, warns tax lawyer

As an HR professional, a letter from the Revenue asking for IR35 tax-related information might not strike you as important but, as we’ll hear shortly, a failure to respond could cause problems for the business. A lack of response, or a rushed reply, can set hares running at HMRC and could, in a worst case, give rise to a full-scale investigation by the regulator. Investigations are usually complex, highly technical affairs and often take a long time to conclude, so best avoided if possible.

So, assuming you are an end user with contractors on your books, why might the Revenue be writing to the business? IR35 enquiries, typically in the form of a letter or questionnaire, seek to determine whether your determination of employment status for your contractors is right or wrong. So, if you judge the contractor to be outside IR35, the Revenue wants to check whether that classification for tax purposes is correct and whether the method used is robust. The responsibility for status determinations now lies with the end-client but the Revenue has never publicised its approach to selecting enquiries yet we are seeing an increase in the number of these letters and questionnaire landing on our clients’ desks. 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. 

So how should HR teams respond if an HMRC enquiry does come your way? Earlier I spoke to tax expert Penny Simmons who has this warning for HR:

Penny Simmons: “This warning is really around letters that are being received from HMRC. Now, these letters are coming in and often they're badged up as ‘contingent workforce audit’, simple questionnaire, friendly email. Often they form the guise of a letter that says the Revenue is looking to understand how businesses are complying with IR35 and managing IR35. So they're just looking for information almost for research purposes and I guess the health warning there is if ever someone from HR, if one of those letters, in whichever form it takes, or emails, lands on an HR manager's desk, check in with your legal team, check in with your tax team, as to how to respond and don't just quickly respond in order to, if you like, tick the box and get it off your desk, but really check in as to how is the best way to respond to those letters from HMRC.”

Joe Glavina: “Are the letters being sent to firms because HMRC already suspects there is a compliance issue or are they sent simply as a matter of routine?” 

Penny Simmons: “That’s a very good question, Joe. The answer varies, and it varies considerably. Sometimes, those letters are simply being sent to businesses in certain sectors that we know that the Revenue are looking at more closely so that the Revenue can quite literally gather information about how different businesses are applying IR35. So the letter might simply be an information gathering exercise that will lead nowhere. In other circumstances, those letters are the start of a fishing expedition and that's where we say that there is higher risk that those letters might lead to a formal enquiry down the line. In other circumstances, the Revenue has specific information about either a business, or it might be an agency or a contractor even, and they are contacting a business for specific reasons which they may or may not make clear in the first instance.”

Joe Glavina: “Typically who would these letters be sent to? Would they normally land on the desk of HR, or someone in tax or legal? 

Penny Simmons: “So, yes, it depends and this is, again, what's very interesting with the communications that are being received from HMRC. It really depends. It may be they go straight to the tax team in which case your viewers won't see those letters in the first instance, it would be the tax team that would see them and the tax team would then contact HR if they felt it was necessary to do so but often, actually, because sometimes they're being badged under employer enquiries, then actually, they will go to the HR lead and they won't go to the tax team. Or it might be that the business doesn't have a dedicated tax team and initial employer, PAYE, IR35, enquiries go directly to the HR Director of a business in the first instance anyway. It often depends how the business itself is structured and that's why, if you like, we keep talking about IR35 because although they are sets of tax rules that primarily will be dealt with by tax teams, and legal teams, because of the different way that businesses organise themselves it’s very possible that initial communications will be sent to the HR teams.”

Joe Glavina: “What happens if these letters from the Revenue are ignored, or dealt with too late?”

Penny Simmons: “Well, letters that are ignored or handled too late, one of the problems then is that by the time it's picked up the Revenue might be asking for quite a wide variety of information and the business then doesn't have time to collect that information, to gather it up, and so the response is rushed, it's not fully considered. If it doesn't necessarily answer the Revenue’s questions in the way that the Revenue is looking for those questions to be answered, it will simply spiral, it will lead to further communications with the Revenue. The other thing is that because of the way these communications from the Revenue are commenced in different ways, there is no uniform approach, and how they then proceed also varies greatly. With some of them it's one or two emails, you answer the questions and then the Revenue seems satisfied and there are no further communications, but we've seen others that are now kind of ongoing after 12, 18 months now because you answer a certain set of questions and then the Revenue asks for more information, It’s because of those, and because we're seeing that happen, that we are saying to HR leads if you do come across these letters get some initial advice. Now that might be internally with your own tax advisers, your own legal team, or it may be externally, but don't just have that knee jerk response of I want to get this off my desk, I want to make this go away and so I'm going to quickly respond to it. Make sure that you don't ignore them and that you make a considered response to the Revenue when you do provide this information.”

Finally, a reminder of an important change that came into force on 6 April which was the IR35 set-off mechanism to prevent ‘double taxation’ of end user clients in cases of status misclassification. Penny talked to this programme about that change and how it impacts end user clients. That’s ‘IR35 set-off mechanism finalised and in force from 6 April 2024’ and we’ve put a link to it in the transcript of this programme for you.

LINKS
 - Link to HRNews programme: ‘IR35 set-off mechanism finalised and in force from 6 April 2024’