What To Do When HMRC Sends You A Status Investigation Letter: A Guide For Construction Business Owners And Directors

Receiving a status investigation letter from HMRC can be daunting, but taking the right steps early can make ALL the difference. This guide outlines 6 key actions to ensure you respond effectively, minimise risk, and protect your business.

Don’t let this process derail your business or destroy your firm. Take positive steps, and you will greatly improve the outcome.

Understand the Purpose of the Letter

HMRC’s status investigation focuses on employment status, whether workers should be classed as employees or self-employed for tax purposes. Misclassification can lead to significant liabilities, including unpaid taxes, penalties, and interest. The risk could be up to £120,000 per worker, so it’s important to take the right actions at the right time.

Fact: In 2021-22, HMRC collected £30.8 billion through compliance activities, with a focus on employment status in sectors like construction.

Case Study: A Northamptonshire Civil engineering firm faced a £500,000 tax bill after failing to correctly classify subcontractors. Early expert advice and legal intervention reduced this liability by 90%.

Review Your Contracts and Working Practices

HMRC will assess your current contracts and compare them with the actual working conditions of your subcontractors. This is often referred to as the ‘Reality Check’. The key areas they will focus on include:

For CIS Sole Traders:

• Supervision – Are you supervising and managing all the work?
• Direction – Do you direct how the work should be carried out?
• Control – Do you dictate when, where, and how the work is performed?

For CIS Subcontractors Trading as Limited Companies (IR35):

• Substitution – Can workers send a substitute or bring their own helpers? How is this managed?
• Mutual Obligation – Are you obliged to offer work, and are they obliged to accept?

Recommendations:

• Conduct a Contract Review: Engage a CIS compliance expert to thoroughly review your contracts and highlight any discrepancies between documented terms and actual practices.
• Update Contracts: Ensure your contracts accurately reflect current working practices. Legal professionals can help draft clauses that protect against misclassification risks.
• Use Trusted Templates: Access free contract templates that provide a solid starting point for compliance.
• Consider Subby’s Compliance Tools: Subby offers a comprehensive contract management system that ensures all your agreements align with HMRC requirements, reducing the risk of costly errors.

Get Your Team Assessed Using a Status Tool

Status assessments of your workers are a critical part of your defence in an HMRC investigation. By conducting regular checks using an appropriate tool, you demonstrate that you’re taking meaningful steps to ensure compliance and reduce the risk of costly penalties.

Recommendations:

• Create a Status Review Checklist: Use HMRC’s CEST tool (Check Employment Status for Tax) combined with internal guidelines to evaluate each subcontractor’s status.
• Utilise Professional Tools: Consider using trusted online status assessment tools or consult your accountant. However, be aware that these services often come with significant costs.
• Partner with Subby for Seamless Compliance: Subby’s CIS payroll platform includes free, automated status assessments as part of their service. This not only removes the risk of non-compliance but also saves you time and money. [Click here to see an example of the status tool].

Seek Professional Advice Immediately

Engaging a tax specialist or employment lawyer early can prevent costly mistakes. A well-prepared response can mean the difference between the case being closed and a six-figure penalty.

Recommendations:

Find an expert, not your accountant – Few accountants have expertise in CIS status investigations; don’t waste time and money if they don’t have proven expertise. Find the people who do. You can find experts online or speak to Subby, and they can talk through your situation and recommend the right person for the job.

Respond Promptly but Carefully, Gather and Organise Evidence

1. Acknowledge receipt of the letter.
2. Request clarification if needed.
3. Avoid providing excessive details or making admissions that could be misinterpreted.

Tip: HMRC may ask for years of records. Only provide what is strictly required and verify all data before submission.

Prepare documentation that supports your case, including:

• Contracts and agreements with subcontractors.
• Invoices and payment records.
• Proof of self-employment status (e.g., UTR numbers, insurance policies).
• Timekeeping records and proof of independent working arrangements.
• Subcontractors are correctly registered.
• You’ve deducted and reported tax properly.

Tip -Don’t underestimate the level of detail and reports that may be requested as part of the investigation. Only give the exact details requested. ‘Oversharing’ can lead to significantly more questions and lengthen the investigation considerably.

Prepare for an HMRC Interview (If Requested)

If HMRC requests a meeting:

• Have a legal or tax professional present.
• Stick to factual answers.
• Avoid speculation or volunteering unnecessary information.
• Request a written summary after the meeting for records.

Extra Tip. Implement Ongoing Compliance Measures

Even if you pass the investigation, it’s wise to future-proof your business by:

• Regularly reviewing employment status using your internal status assessment tool.
• Updating contracts and compliance policies.
• Holding annual compliance audits and training sessions for HR and finance teams.
• Keeping thorough documentation for all subcontractor relationships.

Final thoughts: Take Control of the Process

Effectively handling an HMRC status investigation can protect your business from financial risk and reputational damage. You can ensure the best possible outcome by understanding the process, responding strategically, and proactively managing compliance.

We know not everyone is a tax expert and seasoned status lawyer, and for that reason, many firms have chosen to partner with Subby to avoid all the worry and burden of dealing with an investigation. Our service instantly removes the status risk from you. We take care of everything. No more letters or worry.

If you need expert assistance or help deciding what to do next, then contact us or call us on 0333 344 5200. At Subby, we offer a free, no-obligation support line to firms facing investigation.

Subby also offers a Free Status Risk Assessment that will check your current position and highlight areas where you could be at risk. This review provided a step-by-step guide on what actions you can take to fix the risk areas, helping you safeguard your business and ensure full compliance.