New IR35 letters from HMRC: what they say and how contractors can respond
We were contacted on Friday by lots of contractor accountants whose clients have received new IR35 letters from HMRC -- they are slightly different to those sent a few weeks ago for a different end-client but with one key difference, writes Kate Cottrell of IR35 advisory Bauer & Cottrell.
And that key difference is that doing nothing is now not an option. Essentially, HMRC state they know you treated yourself, as self-employed -- outside IR35 -- but they consider that IR35 applied in 2018/19 tax year, and say you should also consider the 2019/20 tax year.
What HMRC says you need to do by September 19th 2019
HMRC states in the letters: “After looking at the information we have for the 2018 to 2019 tax year, our view is that your contract comes under the off-payroll working rules.”
You need to use CEST or seek advice from a tax expert to check and confirm your status. If you disagree with HMRC’s view, you are then asked to write in with the reasons and evidence or, if you agree, you need to pay up and calculate a deemed payment.
What if I ignore the letter?
HMRC has stated that they will be checking to see what you did and if you have not done, as asked, they will carry out an IR35 compliance check and may also charge you penalties.
What should I do now?
This will depend upon your previous actions regarding this contract and IR35.
'I had an IR35 contract review by an expert/my accountant who said IR35 does not apply.'
- Get in touch with the IR35 expert/accountant.
- Gather the evidence.
- We can only speak for our clients on this third point, but it’s worth making as it may affect other contractors. Specifically, where we have undertaken a contract review and the contract and working practices are outside IR35, we would send through our written report. We would then also complete the CEST tool to support our 'outside IR35' opinion. It may be that we have sought and received confirmation from the end-client on the working practices, so we would say this too. The outside IR35 case (that has all the evidence) should be easy and, in effect, we hit HMRC with it all and often get IR35 cases closed in a couple of weeks.
'I have no written evidence.'
If you have nothing in writing or any detail as to how the IR35 decision was reached and agreed, then you will have nothing to send HMRC in reply. We would advise also that care needs to be taken in this respect with regard to liability time limits. HMRC often tries to claim “carelessness” in order to increase the enquiry period to six years instead of the normal four years.
'I did not get this contract checked at the time.'
- It’s never too late. Get in touch with your accountant.
- Consider having a comprehensive IR35 review now (one which looks at the reality of the working practices, as well as the written contract), and also have a play with the CEST (Check Employment Status for Tax) tool.
- If you have legal expenses or IR35 insurances, contact your insurer to see if this is covered.
- Establish with your accountant the likely tax/NIC liabilities if you have got this wrong. Remember; you may not be able to claim relief for travel costs if IR35 correctly applies. Do not forget about interest and penalties.
Important things to consider
- We do not know, definitively, what information HMRC has. They could have picked you up from the Onshore Intermediaries Reports or they could have established a lot of information from the client already. It may be worth asking others who you know at the client-site if they have heard or learnt anything regarding this.
- Check out your legal expenses or IR35 insurance. This may not be a case of simply letting them deal with this, as many policies rely entirely on there being “a reasonable chance of success,” and if this is not the case, the policy may not cover it.
- An IR35 expert or specialist is unlikely to offer to defend your case unless they have formed the opinion (on a balance of probabilities) that IR35 does not apply.
- Think about the end-client employee who you reported to. Evidence will be sought from them about your working practices. Are they likely to confirm Substitution rights, lack of Control etc?
- If you do decide to argue your case and an IR35 investigation is opened by HMRC, you should be prepared to answer hundreds of questions and your case may drag on for many months and in some cases years before being resolved.
- You must act now – there is little time left especially if you -- like many other contractors -- have taken a holiday.
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