Working through a limited company? You may be concerned about an IR35 investigation by HM Revenue and Customs (HMRC). But the question is: how to protect yourself from an IR35 investigation?
The good news is you can avoid it by keeping good records and evidence of how an engagement actually operates. This can put you in a much stronger position if HMRC reviews your arrangements.
This guide explains the effective ways to protect yourself from an IR35 investigation, what records you should retain, and how status determinations work.
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What Is an IR35 Investigation?
IR35 investigation is an HMRC compliance check where HMRC checks whether a worker or a contractor is a disguised employee for tax purposes. The IR35 rules apply when you work as a contractor through your own company, such as a Personal Service Company (PSC), but act like a normal employee.
The purpose of the off-payroll working rules is to ensure that contractors in these circumstances pay broadly the same Income Tax and National Insurance as an employee would.
What Causes an HMRC IR35 Investigation?
Before getting into the details of how to protect yourself from an IR35 investigation, you must learn why HMRC initiates an enquiry into IR35. HMRC uses a risk-based approach to decide whether to open an IR35 investigation. It may consider information that indicates potential non-compliance. Data from tax records and other sources, trends in the use of personal service companies, and reports of suspected non-compliance are usually considered.
Note: An HMRC investigation does not usually mean you have done something wrong.
Who Is Responsible for an IR35 Status Decision?
The table below outlines the engagement and bodies who determine IR35 status:
| Engagement | Who generally determines status? |
| Public-sector client | Client |
| Medium/large private-sector client | Client |
| Small private-sector client | Contractor’s intermediary |
How to Protect Yourself From an IR35 Investigation?
You cannot legally block or prevent HMRC from opening an IR35 investigation. However, you can protect yourself from the risks and financial penalties of an investigation.
You can reduce the risk of an adverse IR35 determination by ensuring your contract and daily working practices genuinely reflect self-employment and that your actual mode of operations is consistent with those terms.
If you want to learn more about how to protect yourself from an IR35 investigation, follow these points:
Understand Whether the Off-Payroll Working Rules Apply
One of the common ways to protect yourself from IR35 rules is to first understand which IR35 rules apply to your engagement. The rules vary based on whether:
- The client is in the public or private sector
- A private-sector client is classed as small
- An agency is involved in the contract chain
- You work through an intermediary such as a limited company
Before entering into an engagement, check who is responsible for determining whether IR35 applies, based on the client’s sector, size, and how the contract is set up.
Do Not Rely on Your Contract Alone
A written contract is essential, but it must reflect the actual working relationship in practice. IR35 status determination is based on both real working arrangements and contractual terms. This means a contract stating you are an independent contractor does not automatically place you outside IR35.
Keep Evidence of Your Working Practice
Understanding how to protect yourself from an IR35 investigation can be easy if you keep clear evidence of how the engagement actually operates. Keep your documents organised, such as invoices, contracts and amendments, statements of work, deliverables, and any Status Determination Statements (SDS).
Remember, keeping good records is not just administrative but key evidence of your working arrangement if HMRC reviews your case.
Craft a Valid Status Determination Statement
If you provide services through an intermediary to a public-sector organisation or a medium- or large-sized private-sector client, and the off-payroll rules apply, the client is responsible for determining your employment status for tax and providing an SDS.
Additionally, the SDS must state the determination and give the reasons for it. The decision should reflect the actual contract and working practices. If you disagree with the determination, you can use the client’s client-led disagreement process to challenge it. The client must consider your reasons and respond within 45 days.
Hire An Accountant
You may often wonder how to protect yourself from an IR35 investigation with an accountant. Is it possible?
Although hiring an accountant does not eliminate the risk of an IR35 investigation, it reduces the risk of making basic administrative errors on your paperwork. They can help you keep accurate financial records, review the tax implications of your engagement, identify potential IR35 risks, and ensure your contract is written correctly.
Furthermore, if contractual drafting requires legal advice, you may also need a solicitor specialising in contractor or employment matters.
How Common Are IR35 Investigations?
There is no reliable percentage showing how often HMRC investigates a contractor for IR35. IR35 investigations are statistically rare for any contractor, with only a few hundred formal full inquiries initiated each year out of hundreds of thousands of active contractors.
HMRC can investigate where it finds a compliance risk, but it would be misleading to claim that IR35 investigations are either very common or very rare without supporting statistics.
What Are the Red Flags for IR35?
Now that you learn how to protect yourself from an IR35 investigation, you can identify the red flags for IR35. Although there are no official red flags, arrangements are more likely to indicate employment where the worker is:
- Personally required to provide the services
- Is subject to significant client control over how
- When or where the work is done
- Is obliged to continue providing work while the client is obliged to provide it.
Keep in mind that no one factor automatically determines the IR35 outcome. HMRC considers the overall circumstances of the engagement.
How to Avoid Being Inside IR35?
A contractor cannot simply choose to be outside IR35. The rules depend on whether, if a contractor had been engaged directly by the client, they would have been regarded as an employee for tax purposes.
To reduce the risk of an inside-IR35 determination, the contractual terms should accurately reflect the genuine arrangement. Additionally, your actual working practices should be consistent with them. Factors relevant to employment status include matters such as control, personal service/substitution, and mutuality of obligation (MOO), alongside the overall circumstances of the engagement.
How Long Should You Keep IR35 Records?
Keep contracts, SDS, invoices and other supporting records for the appropriate statutory period. Company records relevant to Corporation Tax generally need to be retained for 6 years from the end of the relevant financial year. However, some records may need to be kept for longer.
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Final Thoughts on How to Protect Yourself from an IR35 Investigation
To sum up, the best way to protect yourself against an IR35 investigation process is to keep clear evidence of independent operations and reassess status if working practices change. Moreover, your status must reflect daily working realities. This is because HMRC judges an engagement by how the work is actually done, not just what a written contract says.
If you are facing an actual HMRC compliance check, it is recommended to consider obtaining advice from a qualified UK tax professional who can review the specific facts and documentation.
At MicroEntityAccounts, we offer bookkeeping and tax services. We have a team of experienced experts who can help you manage HMRC correspondence, gather business records, and check contract terms against actual working habits.
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