Contractors' Questions: What now that HMRC says I’m inside IR35?

Contractor’s Question: As a locum worker operating through a limited company, I have been investigated by HM Revenue & Customs and found to be within IR35.

Although a local accountancy firm I use initially fought the case, the firm now suggests that I should accept the decision. I therefore face a huge tax bill and penalty (with very hefty interest added). I really cannot pay the total amount demanded by HMRC as neither my company nor I have got it, so what are my options?

Expert’s Answer: The first step is to ascertain if you are within time limits to appeal the decision to the Tax Chamber. If so, then the file should be reviewed as a matter of urgency by a lawyer to establish whether there are any valid grounds to appeal against HMRC’s decision. Vital legal points such as mutuality of obligations, control and substitution need to be considered in respect of the known facts of the case. 

You mention that the work provided in respect of the contract under review is that of a locum worker; if the work involved undertaking part of the client’s ‘business as usual’ function (i.e. filling in for an employee) rather than providing a specific service, then the engagement is likely to be caught by IR35 and costs may have been wasted in reaching this point.

If the professional advice you receive in light of a case review is that the engagement is indeed caught by IR35, then the options are to either pay in full promptly to mitigate interest and penalties, or to inform HMRC that the company has insufficient funds to pay. In the latter case, HMRC will then enforce the debt by making the company insolvent following the usual enforcement procedure outlined in the Civil Procedure Rules. As usual with IR35, the debt rests with the company rather than the individual director. 

If you decide to appeal the decision, then I strongly recommend that you formally instruct a specialist adviser who is trained in advocacy, civil procedure and law. Generally, appellants to the Tax Chamber, or any other tribunal, have a better chance of success if competently advised and represented. 

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

Editor’s Note: Related Reading -

HMRC guidance on when IR35 applies

Contractors’ Questions: What if I can’t pay my EBT tax demand?

IR35 enquiry: what contractors need to know

Monday 2nd March 2015