'Reasonable care' with IR35 to cost contractors
IT contractors face being compelled to get an expert review of every contract and assignment for IR35, on top of shouldering the cost of an accountant, thanks to a new tax penalty regime.
As IR35 concerns "relevant engagements", contractors will need to satisfy the regime's principle that they took "reasonable care" in each and every placement to avoid a penalty.
Advisors last night said they believed "reasonable care" with IR35 would be to 'seek specialist advice in the form of both a contract review and a review of the working practices.'
Although the taxman said general criteria on what constitutes "reasonable care" could not be provided, it believed it was "reasonable" to expect taxpayers to seek advice on complex issues.
Therefore, contractors who ask HMRC or tax experts for help with challenging matters will be seen as having taken "reasonable care," thereby reducing their risk of a filing penalty.
However, paying an accountant is not guaranteed protection, as HMRC will check if the taxpayer has "taken reasonable steps to check that the agent has made an accurate return."
Encouraging this second-guessing of accountants, doubts remain that traditional practitioners have the knowledge that IR35 requires for them to successfully advise on mitigating its risks.
"It is a review of the contract and the working practices that constitutes 'reasonable care'," said Kate Cottrell, of Bauer & Cottrell, addressing contractors concerned about IR35.
"Unfortunately IR35 concerns 'relevant engagements' so this really means a review of each and every contract".
As if this were not enough, contractors who ask their accountants to check they took 'reasonable care' with IR35 in every assignment may be liable under the MSC legislation.
"Clearly, this [a contract review and review of the working practices] should be independent advice as advice from your accountant could constitute influence and control under the MSC regulations," said Ms Cottrell.
Under the rules, there are specific exemptions for parties from being involved, and therefore potentially liable, who provide advice on whether IR35 applies to a particular engagement.
Advice does not constitute being involved where HMRC finds evidence that the service provider, in addition to considering the engagement contract, considers fully the terms and conditions under which the client is engaged.
Evidence that the service provider challenged inconsistencies in information provided, and later fully cooperated with HMRC to determine the accuracy of the provider's processes also points to exemption
However, the regulations may catch accountants if they cannot prove they had "no involvement whatsoever, directly or indirectly, in the engagement contract with any of the parties in the contractual chain."
Ms Cottrell explained: "Effectively these exemptions mean that an accountant could review the contract, establish and document the working practices, keep records of any challenges to the information provided, keep all records of the processes and co-operate with HMRC in the event of an investigation.
"The main thing that they cannot do is negotiate the contractual terms on behalf of the client. Our experience here is that many accountants prefer to refer their clients to independent suppliers of such services."
HMRC's revised penalty regime dictates 30% of tax owed for not taking "reasonable care," 70% owed for a deliberate understatement and 100% owed for a deliberate and concealed understatement.
Introduced in last year's Finance Act, the penalty regime, and its central plank of "reasonable care," will come into force for all return periods after April 1, 2009.
A Revenue spokesman reflected: "Where HMRC discovers a failure to apply Chapter 8 Income Tax (Earnings and Pensions) Act 2003 [rules known as IR35] resulting in a failure to submit a correct P35 for 2007/08 or later years, penalties will be considered.
"In considering the application of penalties HMRC will have regard to its published guidance on 'reasonable care'. Whether 'reasonable care' is considered to apply will be based on individual circumstances and as such it is not possible to provide general criteria.
"The penalty regime will apply to failures to comply with Chapter 8 ITEPA in exactly the same way as it will to failures to comply with any other piece of legislation."
The tax department was this week reported to be increasing the number of officials on investigations work, but the spokesman denied extra staff would be laid on to enforce the penalty regime.