What two new IR35 investigations on the cusp of April’s off-payroll rules should tell contractors

Late in March 2021 when contractors were focused on the imminent arrival of IR35 reform on April 6th, HMRC opened two new IR35 investigations into PSCs, serving a stark reminder to the contracting community that the taxman has no intention of stopping scrutinising their engagements -- despite the Intermediaries legislation changing, writes Seb Maley of Qdos.

The unlucky contractor duo: the finer details

The contractors, both of whom we are representing, contacted us after receiving correspondence from the Revenue. And the department’s enquiries, which were opened on March 25th and 26th respectively, concern a time when they -- like all other private sector contractors -- carried the IR35 liability.

One case relates to the 2018/19 tax year and a contractor working in financial services. The other engagement under scrutiny is more recent, 2019/20, and focuses on an IT contractor engaged by a private sector organisation in the transport sector.

So were these two new IR35 investigations a strategic move from HMRC? A reminder to contractors that engagements completed before IR35 reform are still fair game for the tax authority? Or, looked at differently, are these the very last enquiries before HMRC switches its focus to end-user businesses?

The former, not the latter, unfortunately. And here’s why...

The potential sign of things to come

It’s no secret that HMRC is under pressure to raise revenue to repair the economic damage of covid-19. They also see IR35 compliance as a key area in which to reduce the deficit. And while IR35 reform has arrived, meaning in most cases organisations shoulder the IR35 risk for new contracts, that’s not to say HMRC cannot and will not keep approaching contractors for a number of years.

Remember, HMRC can look back as far as six years into arrangements pre-dating April’s IR35 reform. This means the door has been left wide open by tax officials, who can now theoretically tackle compliance among both contractors and end-user businesses.

Ominously, the same goes for contractor engagements that have transferred from outside to inside IR35 in recent months, invariably as a result of the new off-payroll rules. Granted, HMRC may have said they won’t use new information acquired due to the IR35 changes to open an investigation, but again, such information would undoubtedly be used by the Revenue if they did happen to launch an unrelated enquiry. This means you simply cannot rule it out.

Don’t be fooled by HMRC’s ‘softer’ approach

The HMRC letters received by the under-investigation contractors give no indication of why the enquiry has been opened. Instead, they request a host of information from the contractor, from which the investigating officer will then no doubt build their case from, and reveal further details in time.

This ‘softly-softly’ stance is significantly different from the aggressive letters sent by HMRC in 2019 to 1,500 contractors engaged by pharmaceuticals giant GSK. These accused contractors of non-compliance and went as far to tell the individuals how to pay the tax HMRC deemed payable.    

That’s not to say any IR35 letters received by contractors in March should be taken any less seriously, though. Whichever way you look at it, an IR35 enquiry is an IR35 enquiry regardless of what, on the face of it, seems to be a softer approach from HMRC.      

What can contractors learn from these two new IR35 probes?

The fact is, HMRC is still targeting contractors and the IR35 risk remains -- even if these cases were launched just before IR35 reform was rolled out. Despite reform of the Intermediaries legislation now being in play, HMRC will continue to police IR35 compliance retrospectively, enquiring into contracts that took place before the liability was transferred to the fee-paying party.

To a degree, the threat that IR35 continues to pose to contractors is being overlooked by some contractors. It’s something that PSCs need to be acutely aware of and, in my opinion, protected against for the foreseeable future. Moreover, before the introduction of reform, the taxman was of the view that nine in 10 contractors who should be working inside IR35 weren’t. Now, with a remit that means PSCs and businesses can be investigated, don’t be surprised to see HMRC do exactly that.