IR35 reform spells new guidelines for tax inspectors

The first stumbling block to the taxman’s proposed model to improve IR35 and the administration of the much-disliked legislation has been realised.

Speaking to CUK, leading tax advisors to contractors said HMRC’s proposed customer segmentation model would require the issuing of new guidance – not just to taxpayers but to Revenue officials as well.

This is problematic, in the advisors’ eyes, because the existing guidance on IR35 which HMRC issues internally is already routinely ignored.

Fresh from overturning the IR35 case of engineering consultancy MBF Design Services, and more recently IT contractor company ECR Consulting, lawyers at Accountax Consulting explained:

“We already see too many cases where HMRC inspectors flout their own existing internal guidelines and do not work cases efficiently or sensitively to the freelancer’s delicate position with the end-user/client.

“Any new guidelines issued to inspectors will only be effective if those inspectors receive the appropriate training”.

Moreover although any new approach to IR35 by HMRC is, in theory, “all well and good,” true change that improves the position of taxpayers is unlikely without tax inspectors undergoing a “paradigm shift”.

Accountax’s director Matt Boddington reflected:“The mentality of some over-enthusiastic inspectors [is] that all one-person limited companies are within IR35 by default, and [are] ‘guilty until proven innocent.’”

A former Revenue official who specialised in director compliance agreed, saying the new guidance for HMRC inspectors to reflect the segmentation of customers under IR35 would be no match for their overzealousness.

He said: “Once they’ve got their hooks into you, there’s no way the Revenue officer is going to say ‘Oh according to the guidance this is a low-risk case, so I won’t bother.’

“Basically for the Revenue and its staff, it’s all about yield - what taxes can they throw at a business  and which ones will stick. I’m almost ashamed to say it but I’ve done that myself so I know [it happens].”

Still, the mere fact that HMRC is willing to debate improvements to IR35, and offer some transparency by publishing the IR35 Forum minutes, is welcome, according to contractor tax firm Privilege Accounts.

“At this stage, something [the customer segmentation model] is better than nothing,” the firm said, speaking ahead of the forum’s second meeting, due to be held later today.

“The original intent behind IR35 legislation is not in question – the need to ensure that only taxpayers who are genuinely in business on their own account pay tax accordingly, rather than allow ‘employees’ to construct artificial arrangements to reduce their tax.” 

But almost in a warning to the forum , Privilege’s co-founder said that “in the absence of clear and unequivocal employment tests, any attempt to legislate in this area [IR35] is destined to flounder.”

Barry Roback added: “Until the legislation is [more] thoroughly reviewed and fundamental changes made to it, my fear is that taxpayers will remain with uncertainty over their tax affairs.  Only time will tell if I am wrong, but I fear not.”

Should he be proven right, it means that the Revenue and the IR35 forum will have failed in what they set out to achieve, individually and collectively.

A spokesman for HMRC told CUK: “One of the key objectives of HMRC’s work with the IR35 Forum is to provide those potentially within the scope of these rules greater clarity and certainty about the circumstances in which the legislation is applicable.

“There will be improvements to HMRC’s guidance on IR35 to support this objective.”

Wednesday 29th June 2011