Contractors' Questions: Will HMRC investigate if I move to Flat Rate VAT?

Contractor’s Question: Would submitting micro-accounts and registering for Flat Rate VAT make me more susceptible to an IR35 investigation?

Expert’s Answer: The short answer is ‘no.’ The IR35 disputes we see usually start in the form of a ‘Check of Employer Records’ where the opening letter asks whether IR35 has been considered, but they can also emerge from a full enquiry into a business or director’s self-assessment tax return. While some enquiries are selected entirely at random, the vast majority are launched following a risk-based approach by HM Revenue & Customs.

Understandably but rather frustratingly, HMRC does not publish the exact parameters used to select businesses and individuals for enquiry; IR35 or otherwise. What we do know, is that HMRC’s analytical software system called Connect has helped deliver more than £3bn of additional income for HMRC since it was first adopted in 2010 and is now responsible for choosing 95% of cases for investigation. It currently holds a huge 22 billion lines of data.

All of the information HMRC gathers from other government agencies, banks and building societies, social media sites and the Tax Evasion Hotline, just to name a few sources, is fed into Connect to pinpoint potential risks and relationships between businesses and individuals.

Specific factors which might highlight that a company is likely to be at risk of an IR35 dispute include a relatively small turnover, the type and amount of expenses claimed, as well as a small salary and high dividends to a sole director (and/or spouse). The choice of company name could also play a role, for example ‘Joe Bloggs Consultancy Ltd’ arguably promotes the idea that the company is used only as a vehicle to provide Joe Bloggs’ services and is not operating as a ‘genuine’ business. Even a director’s ‘lavish’ lifestyle can be a trigger for enquiry, if HMRC cannot see how that lifestyle is being financially supported.

The expert was Rebecca Walker, an IR35 specialist status consultant at Abbey Tax.