Contractors' Questions: Should I send my contract to be reviewed by HMRC?

Contractor’s Question: In the new IR35 guidance from HMRC, contractors are invited to get in touch with the tax authority if they want help with IR35. The Revenue says it can answer any queries a contractor might have on the legislation through a confidential helpline. It even says it will review a contract if an individual wants certainty about their position under the legislation. Is getting in touch with HMRC for advice, or a contract review, recommended?

Expert’s Answer: In essence, this approach is fraught with risk. Indeed, despite denials from HM Revenue & Customs, sending your contract to the Revenue for a free review is placing your company and yourself at their mercy.

The new guidance, formally released by HMRC on May 9th, does not change existing legislation (in fact it ignores the basic question of mutuality of obligations). Even more crucially, HMRC's service does not provide an opportunity for amendments to be made to a contract to accurately reflect the working practices. 

In practice, a large proportion of contracts do not reflect the actual working practices when initially reviewed - careful redrafting and negotiating with the recruiter and end-client is often needed to correct the contract in question. This may be due to bad practice on the part of the recruitment consultant and lack of clarity by the end-client. If a contractor relies on HMRC's service and has already started an engagement (note, HMRC does not offer a time scale) it may be too late to seek legal advice to correct the mistakes.

The Law Place has acted for contractors in respect of HMRC's previous review service where complaints have been made concerning excessive delay. Anecdotal evidence suggests that the new service will be just as slow and inaccurate. In addition, in the absence of new funding from the Treasury, the first question is how HMRC intends to fund this service.

The most cost effective solution for any contractor would be to seek legal advice from a professional contract reviewer specialising in employment law as soon as a contract has been offered. The costs of defending an IR35 inquiry are always much higher than a pre-emptive independent contract review. Indeed, the costs of dealing with HMRC's correspondence in the initial phase of an inquiry alone are likely to be 4-5 times that of an IR35 Contract Review. It is clear from the new guidance that HMRC intends to deter contractors from legitimately operating outside of IR35 using companies and, herd them towards umbrella companies or out-dated and inherently risky PAYE self-employment.

In conclusion, we strongly advise contractors to take into account that HMRC will not redraft a contract to accurately reflect the working practices and there is no absolute guarantee that a negative result won't lead to an IR35 inquiry.

The expert was Martyn Valentine, founder of The Law Place, an IR35 advisory for contractors.

Editor's Note: Related Reading -

Seeking taxman's help 'sparked IR35 probe'

Wednesday 16th May 2012