IR35 Guide: Audits, Be Prepared

If you decide that IR35 did not apply then be well prepared in case HMRC do pick you out for an investigation. If you've got documentary evidence of spending time deciding on the contract's status and the reasons for your decision, then any penalties will be far less if you've ultimately got something wrong in an IR35 status audit.

In an investigation HMRC will probably start off assuming you’re holding out on them; it's best to be prepared with evidence that you’re a proper freelancer. If there is an agency involved, and your relationship with the end client is a good one, then documenting the real arrangements might be helpful; remember it must be accurate as you might need to rely on it in court.

Passing an IR35 audit is a bit like passing a driving test. You can drive safely and competently and still fail a driving test on a technicality. Same with IR35. it’s difficult to be sure exactly what the inspector will look for; they'll weigh up many different factors and try to ‘paint a picture’ of the overall engagement. The strongest indicator is the contract you signed; if there is an agency involved HMRC may look at the contract between the agency and client. Key elements of the contracts, for example:

• it’s relevant to the work you are doing for a particular client and isn’t just a general one copied from a contractors website
• It has a substitution clause allowing you to substitute other people in your place to carry out the contract if it becomes necessary. Ideally there is evidence of this clause being used or evidence of an agreed procedure with the client
• Allows the client to terminate without a notice period
• You're not directly controlled on what, when, where and how work is completed day-to-day
• There are financial penalties if the contract isn't delivered on time
• The contract is project based; it has defined deliverables and milestones
• You have to fix mistakes in your work at your own expense
• You are not working exclusively only for one client
• You work with your own materials (Laptops, software, specialist tools) on site

If more of these points are in your favour then there’s a better chance that the assessment will decide that IR35 doesn’t apply.

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