IR35 Audits: Top 6 Things You Must Know

What you need to know if your business is being audited.

June 19, 2024

Rumors of HMRC stepping up its IR35 activity started to gather pace at the beginning of the year, with many believing HMRC will be keeping businesses on their toes by carrying out more compliance checks, ensuring IR35 compliance obligations are being managed correctly. So what does this mean? Worksome’s Contingent Workforce Compliance Director Ray Walker explains what you need to know if your business is being audited.

What is the current state of play?

"2023 is likely to prove a critical time for all users of off-payroll talent. Having recently passed the private sector reforms second anniversary, we are witnessing signs of increased HMRC audit activity. I expect they will be looking for a very big but easy win as a first case. Those companies with robust processes in place could benefit from this since, being considered as low risk, they will likely move outside of their immediate radar." 

What does an enquiry letter look like?

HMRC off-payroll compliance check letters are focused around the process and policies end clients have adopted in respect to all off-payroll compliance - it will consider how you assess the workers status, the number of contractors you are engaging in scope of the off-payroll rules, details of projects you operate as ‘contracted out’ (aka Statements of Work) and those through external umbrella companies. It’s likely to look something like this: 

HMRC IR35 Enquiry OPW Letter
HMRC IR35 Enquiry Schedule of Information

I’ve received an enquiry letter. What should I do next?

“You should immediately consult with your General Counsel to determine the best way of responding to HMRC. But if you are supported by Worksome, and due to our IR35 Fee Payer insurance policy, you must make us aware at the same time. This will allow us to lodge a claim with our underwriters, who will instruct their IR35 legal experts to work with your legal team.” 

What can I do in preparation for an IR35 enquiry?

“You can start by ensuring your processes around your entire off-payroll engagements are robust and will stand up to a test of ‘Reasonable Care’. With regards to IR35, it starts by confirming that correctly constructed SDS’s exist, have been distributed in a timely manner, and to the correct parties in your supply chain. You need to provide the functionality for the worker to formally dispute their SDS throughout the project. The SDS itself must reflect the true operating environment and not only what is stated on the contract held with the worker. 

Are companies that use a partner like Worksome, less likely to be audited or scrutinized by HMRC?

“Using such suppliers will help support a stance of taking 'Reasonable Care' around your IR35 obligations. It also means that when a HMRC enquiry happens, you should be able to rely on your suppliers to provide the necessary IR35 data that HMRC will need to see.”

Have there been any known fines within the private sector for breaching IR35 so far?

“Not yet because of the limited amount of time since the legislation was enacted. HMRC have opened some initial enquiries so we will soon witness developments in this area. In the Public sector, however, there have been numerous wins for HMRC who have imposed over £250 million of tax, fines and penalties. It would be wrong to think exactly the same timeframe and fines will happen in the Private sector as Public sector users do not legally challenge HMRC’s opinions. But it does provide us with an insight into HMRC’s intentions.”

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Please note, any information provided by our experts is for general information and guidance only. Each situation is unique and would require professional legal analysis.