What July’s IR35 Forum meeting means for contractors

The latest meeting of the IR35 Forum, which took place on July 23^rd 2012, was concerned with various updates on HM Revenue & Customs activities relating to IR35 and other areas.

Here, exclusively for ContractorUK, IR35 Forum member Kate Cottrell, of employment status firm Bauer & Cottrell, a former tax inspector who was seconded by the Office of Tax Simplification (OTS) for the IR35 review, reveals what the main points of the meeting mean for contractors.

P35 ‘Service Company’ question must be answered correctly from next tax year

The annual questions on the P35 form have caused confusion for years now, with many claiming there is no such thing as a Service Company and many just ignoring the questions on the basis there is no legal requirement to complete them.

Some have taken the view that answering the questions just highlighted to HMRC that you are an IR35 target.  It was also clear in the OTS report on IR35 that few people answered the questions making the IR35 population difficult to quantify. 

All is about to change from 2013/14. The original two-part question 6 on P35 will be merged into one, so it will state, “Are you a service company who has operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?”

The actual wording could be subject to change, but it will be a legal requirement to answer the question.  As with any compulsory question, failure to answer or provide an answer that later proves to be incorrect will incur penalties e.g. penalties for an incorrect return.  I hope that there will be clear guidance issued alongside the new question and contractors should look out for this nearer the time.

HMRC update on how the new IR35 compliance processes are faring

In the meeting, HMRC reported:

• A consistency of approach by the three new IR35 compliance teams, with the overall strategy now the responsibility of one individual
• The number of IR35 reviews has increased
• Reduced turnaround times – one case concluded in six weeks
• It is too early for any meaningful data, or analysis, on the new processes including on the Business Entity Tests

Some early positive results

HMRC mentions that one IR35 review case settled in just six weeks, which is very encouraging given the turnaround times of the past. But we can beat this, with closure for one Bauer and Cottrell client achieved in just three weeks! HMRC wrote to our client on June 21^st 2012. In response, we provided a detailed technical submission together with the requested financial information to HMRC on July 17^th 2012 and received the all clear on August 8^th 2012.

Hopefully we are seeing the beginning of the end of both long, drawn-out IR35 investigation cases and the worry and distress they have traditionally caused.

‘Check of employer records’; ‘IR35 Check’, ‘Business Records Check’, ‘Compliance Review’, ‘IR35 investigation’, – Confused?

Contractors should not be confused by all these different headings as they all amount to the same thing.  The IR35 Forum minutes refer to IR35 “reviews taken up by HMRC” and the IR35 letters being sent out by the three HMRC teams are headed “Check of employer records”.  It makes no difference what they are called, as they are all concerned with investigating your IR35 status and should be treated in the same way with care and careful consideration.

The Real Time Information (RTI) programme 

This will affect all contractors and there are some, as yet, unanswered questions as to RTI’s interaction with IR35. Those contractors who declare contracts inside IR35 will experience the most change owing to differing timescales for reporting.  All should become clear before April 2013 when the new system starts. There may also be further details pertaining to RTI at the next IR35 Forum meeting, scheduled for October 9^th 2012.