Can IR35 be backdated?

IR35 reforms have significantly changed how contractors are assessed for tax purposes. One common question is whether HMRC can backdate an IR35 determination. Understanding how far HMRC can look back and the risks involved is essential for anyone working through a personal service company (PSC).

HMRC will not make retrospective claims against limited companies and will not conduct targeted campaigns into previous years’ tax payments for those whose IR35 status will change as a result of end clients’ assessments. Obviously, HMRC reserve the right to look backwards in certain situations, and you should always exercise caution.

The four-year rule and six-year rule

Despite how it may seem sometimes, HMRC aren’t monsters and they don’t assume everyone is out to defraud them. If they find honest mistakes in your accounting (and let’s face it, these can happen to anyone), they reserve the right to extend an IR35 enquiry back by up to four years. This means they will look at your assignments and working practices during that period and check that you paid the correct tax and NICs.

If all they find is the odd innocent error, then you’ll be billed for anything you owe them, and everyone is happy.

However, if they find that you have been noticeably and persistently careless, they can extend their enquiry back as far as six years to ensure the correct tax and NICs are paid.

Clarifying the timeline of IR35 responsibility

For any services provided before April 2021, the tax liability sits with the contractor, not the end client. The off-payroll rules for the private sector took effect in April 2021, following a one-year delay due to the COVID-19 pandemic.

For private sector engagements before April 2021, the contractor remains liable for any IR35-related tax payments. However, for engagements after this date, the liability shifts to the fee-payer—typically the recruitment agency or end client—where applicable.

The 20-year rule

If HMRC looks at your accounts and working practices and suspects there has been deliberate fraudulent activity or tax avoidance, then they have the right to investigate as far back as 20 years. If you are found to have been deliberately avoiding tax, there would be serious implications, including paying back anything owed, fines, and potentially even a custodial sentence.

What triggers an IR35 investigation?

It is not publicly known what specifically triggers an IR35 investigation by HMRC. If it were known, people could attempt to manipulate their circumstances to avoid scrutiny. However, we do know that HMRC has access to a wide range of data on contractor engagements, and multiple factors may contribute to an enquiry being opened.

One common trigger is inconsistencies in tax filings. If the information submitted to HMRC suggests a discrepancy between declared earnings, expenses, and employment status, it could raise red flags.

Another key factor is information sharing within HMRC itself. A completely routine VAT inspection could uncover details that are passed to the IR35 team, prompting further investigation. Additionally, HMRC may conduct industry-wide compliance checks or run targeted campaigns focusing on specific sectors, increasing the likelihood of investigations.

How likely is it to be investigated by HMRC?

This is a difficult question to answer definitively. Before the changes in legislation, it was widely believed that HMRC conducted around 250 IR35 enquiries per year, which is a relatively low number considering the size of the contractor workforce in the UK.

However, since the reforms, HMRC has changed how it conducts investigations. Rather than targeting individual contractors, HMRC can now approach end clients and review multiple contractors at once. This means that even if the number of enquiries remains similar, a single investigation into an end client could involve many contractors.

Because of this, relying on the assumption that an enquiry is unlikely is not a safe strategy. Instead, contractors should ensure their IR35 status is robust and defensible in case of an investigation.

IR35 insurance

IR35 insurance won’t help you if you have committed tax fraud, but if you are operating legitimately outside IR35, our IR35 Protect cover can help make sure you are protected should your IR35 Status Determination be challenged for contracts going forward.

It includes £100,000 of cover for taxes and interest from HMRC and penalties from HMRC. It also includes £100,000 of cover for IR35 status enquiry defence costs as well as more traditional Legal Expenses cover.

This means you, the fee payer, and the client (under the new system) are indemnified in the event of an IR35 status enquiry. The cover also has the option to include one or more IR35 Status Reviews to give you an independent view of where you stand with the legislation.

For more information, you can contact the team at Kingsbridge by calling 01242 808740. We can also help you with other aspects of contractor insurance such as Professional Indemnity and Public Liability should you require it.