IR35 enquiry by HM Revenue and Customs

How HM Revenue and Customs decides if they will open an enquiry into IR35, the enquiry process and how to appeal.

When HM Revenue and customs will open an enquiry

HM Revenue and Customs (HMRC) uses a risk-based approach to decide if they will open an enquiry to determine if IR35 applies to you. Where an enquiry is ongoing, HMRC accepts that facts may emerge at any stage to demonstrate that IR35 doesn’t apply.

Until 5 April 2015, you can self-assess your risk by using the HMRC business entity tests and scenarios. If the test places you in the low risk band this result can help resolve an IR35 enquiry. If asked, you should show HMRC your evidence for this test result. If you demonstrate to HMRC’s satisfaction based on the business entity tests that you’re outside IR35 or in the low risk band, then they will close their IR35 enquiry. HMRC won’t check again whether IR35 applies to you for the next 3 years as long as:

  • the information you’ve given HMRC is accurate
  • your circumstances - in particular your working arrangements - don’t change in that time

The IR35 enquiry process

When HMRC opens an enquiry into your company or business, you’ll get a letter asking you to:

  • explain why you’ve decided IR35 doesn’t apply to you
  • give a breakdown of your limited company or partnership’s income for a particular year
  • provide copies of all your written contracts for work during the specified year

If you respond with adequate evidence to show you’re not within IR35, HMRC will close the enquiry.

If after examining the written contracts HMRC thinks that IR35 may apply, they’ll send another letter asking for a face-to-face meeting with you, as the director of your company or as a member of your partnership.

By accepting HMRC’s invitation for a face-to-face meeting:

  • the enquiry can usually be concluded more quickly
  • questions from HMRC can be answered immediately in the meeting
  • you have the opportunity to talk to HMRC, clarify exactly what IR35 is and means, and ask any questions that you have

If you don’t accept HMRC’s invitation for a face-to-face meeting, HMRC will carry on with their enquiry by writing to you.

If necessary HMRC will use Schedule 36 notices to obtain relevant information for their enquiry from you.

During the enquiry, HMRC will consider the contract(s) that govern the relationship between the worker and the client. It’s important to consider the actual working relationship, rather than just what’s written in the contract. There are special rules if you’re providing your services to the client as an office-holder or to perform the duties of an office-holder.

HMRC will look at the written contracts between the intermediary and the client to see if the terms and conditions show whether it falls within IR35. If there’s an employment business or agency involved, they will look at the written contract between the agency and the intermediary, and also the contract between the agency and the client.

HMRC will also look at how the terms and conditions of the contracts are put into practice to see if they accurately reflect the reality of the way in which you’re working.

HMRC will examine any evidence you have to support the written contractual terms and conditions. They’ll consider all relevant contracts, supporting documents and evidence. This includes any contracts between the client and any agency or employment business involved in the arrangements. For IR35 purposes, these are known as third party contracts.

Third party contracts

A third party contract is a contract that you’re not directly a party to. For example, if you have a service company to provide your services and that service company uses an agency to find clients, then the contract between the agency and the client will be a third party contract. It’s also known as an ‘Upper Level Contract’.

The way in which you work for your client determines whether or not a particular engagement falls within IR35. The third party contract is important because it details the client’s expectations of you as the worker.

If you’re unable to provide third party contracts then you should ask the relevant party to send a copy direct to HMRC, noting on whose behalf it’s been sent and why. HMRC won’t share this written contract with other HMRC or government business areas unless it’s for legal reasons. For example, in a Tax Tribunal.


There’s no such thing as an ‘IR35-proof’ contract. HMRC won’t just look at what’s written in the contract. They’ll look at the actual working relationship between you and the client. Each written contract will only be accepted as valid evidence if it accurately reflects the individual circumstances of the work engagement.

HMRC opinion on whether IR35 applies

Once HMRC has finished their enquiry, they’ll issue you with an opinion on whether IR35 applies to you. If you disagree with this opinion, you have the right to object and explain why. If HMRC doesn’t agree with your objection, they’ll issue a decision. You have the right to formally appeal against this decision.

You can appeal directly to a Tax Tribunal. Alternatively you can ask for the case to be initially considered by HMRC staff from its reviews and appeals team who won’t have been involved in the case before. If the HMRC reviews and appeals team conclude that IR35 applies, but you don’t agree with their decision, you can still then appeal to the Tax Tribunal.

As with other tax appeals, if you don’t agree with the tribunal’s decision, then you have the right to ask that the higher Courts consider your appeal.

Penalties and sanctions

If you’re found to be within IR35 following an HMRC enquiry, you must pay HMRC the tax and National Insurance contributions due, as well as any interest due on these amounts.

If the circumstances of your case show that you didn’t exercise reasonable care in completing your tax and National Insurance contributions returns you may also have to pay a penalty.

The penalty will be a percentage of the tax and National Insurance contributions that HMRC would have lost if they hadn’t carried out their enquiry. The percentage is decided by looking at your behaviour - including whether or not inaccuracies in information you supplied to HMRC were deliberate or not. The penalties are applied in accordance with Schedule 24 of the Finance Act 2007.

Published 14 June 2014