What the fourth IR35 Forum meeting means for contractors
Risk rules – not contract by contract
At the fourth IR35 Forum meeting (on 09.11.11) HM Revenue & Customs said it intends to look at a contractor’s business in totality, rather than on a contract-by-contract basis, in order to restrict IR35 reviews to high risk cases.
Before contractors start popping champagne corks, this announcement refers only to the IR35 investigation selection process. It should not be taken to mean there has been any change in the law. So the law still requires IR35 to be considered on a contract by contract basis. The change is about the risk process HMRC uses to choose a case for investigation.
Currently then, the shift of focus away from contract scrutiny is not significant, although it may come to have a huge impact if a contractor has been ignoring IR35 and suddenly finds him/herself as high risk.
Increased compliance activity
As it has suggested in previous meetings, HMRC wants to focus and increase its compliance activity against such higher risk cases. This will also enable HMRC to test their new approach as required in the Forum’s Terms of Reference. Those contractors at higher risk have not yet been identified.
Scenarios, sub-meetings and ‘low risk’
In October and early November, IR35 Forum member the PCG, the freelancers’ trade body, held two meetings for the non-HMRC Forum members. Many members managed to attend at least one of these two Forum sub-meetings and the feedback was put to HMRC on November 7th 2011.
The agenda for these meetings was to discuss the IR35 scenarios put forward by HMRC (in September’s Forum meeting), in order to consider the application of IR35 in each case and to identify where there is agreement on the IR35 rules - and where differences of interpretation remain.
Interestingly, and reflecting on how it will refine its IR35 risk assessment process, HMRC indicated that in the event that a low risk contractor business was selected for intervention, then the Revenue would seek to withdraw from the cases as soon as possible.
This means that upon a low risk case where withdrawal is appropriate, HMRC will withdraw - stop its pursuit under IR35. Although such a commitment may sound positive to contractors, and to a resource-conscious HMRC, this will be a tricky one to achieve unless the next IR35 Forum meeting sees 100% agreement between both the forum’s HMRC members and its non-members on who is - or is not, low risk.
Four months to go until you meet the ‘Son of IR35’
More certain than the details is the timeline. The new system for the administration of IR35 will be in place for April 2012. That means the whole framework has to be up and running in a little over four months’ time.
A further two sub-meetings are scheduled for next month; the first to discuss the scenarios with HMRC and the second to discuss the operational processes. The IR35 Forum meets for its fifth meeting the following week, on January 18th.
What should contractors do now?
Until the new processes and practices are agreed and published it is business-as-usual. It may be, come April, that some contractors find they are a low risk case and are unlikely to be investigated. It may also be that some find themselves as high risk. Wherever they stand though, there should undoubtedly be a greater level of clarity and certainty for contractors and, hopefully, significant improvements to the Revenue’s IR35 investigation process.
Additional IR35 Forum 4 pointers
- PCG gave presentations at the sub-meetings of their Business Test, a revamped version of the paper and model previously put to the Office of Tax Simplification.
- HMRC circulated the most frequently asked questions on the dedicated IR35 helpline to Forum members before the meeting. “What is IR35?” topped the list. PCG said not a single member had used the helpline, despite HMRC’s reassurance that it is not used for compliance activity.
- Although it previously declined to share details of its risk profiling processes, HMRC says it will publish “general risk criteria,” so contractors providing their services via intermediaries can judge their own level of risk. The tax authority’s full set of risk parameters for IR35 “always need to remain confidential”, HMRC said, mindful of its duty to protect the public purse.
- The Revenue must revise and update its internal and external guidance, as CUK anticipated, to reflect its new approach to sharing its general risk criteria, which is being made so taxpayers can identify whether they are deemed low or high risk under the legislation.
The fourth in a series of comment pieces on the IR35 Forum, exclusively for CUK, by Kate Cottrell, of employment status advisers Bauer & Cottrell, an IR35 Forum member, who was seconded by the Office of Tax Simplification for the IR35 review.