Navigating the complexities of IR35 and off-payroll working compliance could be a daunting activity for contractors.

And with HMRC’s ever-watchful eye on those that may be skirting the foundations, understanding what may set off an IR35 investigation is essential, writes Nigel Nordone, head of tax at Qdos Contractor.

How does HMRC choose IR35 investigation targets?

HMRC’s actual strategies for choosing who to analyze stay considerably secretive, and truly some enquiries are undertaken fully at random. That mentioned, we do know that sure patterns and behaviours are prone to entice better scrutiny.

In truth these are the highest 4 IR35 purple flags that might set off an HMRC investigation:

1. Excessive dividends, low wage

When a contractor takes a low wage, they pay much less in worker and employer Nationwide Insurance coverage contributions and decrease revenue tax. The rest of the corporate’s earnings are taken as dividends, that are taxed at a decrease charge than wage and should not topic to Nationwide Insurance coverage. Whereas that is completely respectable, HMRC may interpret this as a contractor manipulating their revenue to keep away from paying the upper taxes related to an ‘inside IR35’ working association.

2. Excessive share of revenue from one shopper

If HMRC decides to analyze a contractor’s tax compliance, they’ll be searching for purple flags that point out working relationships extra akin to employment (inside IR35) than self-employment (exterior IR35).

One among these elements is ‘Mutuality of Obligation’ – that’s, the expectation that the shopper will present work and the contractor will settle for it. When a contractor derives a excessive share of their revenue from a single enterprise, it will probably counsel a degree of dependency and continuity that resembles an employee-employer relationship.

There’s nothing flawed with contractors performing a whole lot of work for a single shopper.

Nevertheless it does imply each the engager and the contractor have to tread extra rigorously in the case of IR35 compliance. For instance, utilizing a dependable standing evaluation instrument, making certain the working contract is evident, and for contractors, preserving detailed proof of different actions that exhibit your PSC’s legitimacy.

3. Giving off ‘half and parcel’ vibes

To find out a contractor’s IR35 standing, HMRC will make use of a number of exams, considered one of which is called ‘half and parcel’. This implies HMRC will look to see if a contractor has develop into so built-in into the shopper’s organisation, that one may argue the contractor performs an integral half within the enterprise.

These elements will be apparent, like having your individual desk within the workplace; being requested to handle staff, or having unrestricted entry to the premises.

Nonetheless, ‘half and parcel’ indicators may also be extra delicate, equivalent to having an organization electronic mail tackle and signature, being offered paid coaching alternatives, and even consuming in a subsidised canteen!

Whereas these latter few factors definitely aren’t sufficient to place you ‘inside IR35’ on their very own, HMRC may use them as proof in increase an entire image of your working practices. Because of this, it’s necessary to all the time keep clear distinctions and limits.

4. Not managing your different tax affairs effectively

There may also be what’s referred to as ‘oblique’ triggers for an IR35 investigation by HMRC.

Which means you’ve carried out one thing incorrectly that’s caught the attention of the Income, they usually determine to dive additional and examine your total tax compliance.

For instance, if HMRC notices discrepancies or irregularities in your VAT returns, it’d immediate them to scrutinise your IR35 standing and dealing practices, too. Even when your working preparations are completely compliant with the IR35/OPW guidelines, nobody needs the stress and problem of an investigation, so it clearly pays to make sure that all facets of your tax affairs are managed effectively, precisely and ideally, with the assistance, abilities and HMRC-nous of an adviser.