HMRC sends IR35 compliance letters to contractors

HM Revenue & Customs has begun writing to the first personal service company contractors identified for investigation under the new, supposedly improved IR35 regime, Contractor UK has learnt.

The letters, the content of which have been shared with CUK, were promised last month in a HMRC guidance note, informing PSC contractors of its new “risk-based approach to checking” for IR35 compliance.

In the shape of six IR35 scenarios, new taxpayer-guidelines and a ‘business entity test,’ HMRC said its three-part guidance package was to let contractors work out the risk that its officials will check whether IR35 applies to them.

It made clear the guidance is ‘not comprehensive’; is voluntary and cannot tell PSCs “for sure” if they are caught by IR35. PSCs are also under no obligation to tell HMRC which risk band (low, medium or high) they fall into.

Still, “If we think that IR35 may apply to you, we will write to you and ask you whether you have thought about IR35,” the Revenue said at the time. “If you tell us that you think you are outside IR35, we will ask you for evidence.”

On cue, HMRC dispatched its first ‘IR35 letters’ last week, signed off by three new IR35 compliance teams, each with 12 members and a status inspector, operating out of Edinburgh, Manchester and Croydon.  

“The detail and language from HMRC is pretty much as expected,” an IR35 advisor in receipt of the letter said last night. “The Revenue is asking the contractor whether he has considered IR35 and, if he has concluded that the company is not subject to that legislation, to explain the basis upon which he arrived at that conclusion.”

The advisor added that HMRC is seeking the contracts and the supporting explanations for the contractor’s last trading year. The contractor has been given a month to respond and HMRC warns that it may be necessary to arrange a meeting following receipt of the information provided.

Should the advisor be able to prove to HMRC’s “satisfaction” that the contractor is outside IR35, or in the ‘low risk’ band, any IR35 review will close, with HMRC undertaking to not check the rule’s application to him for the next three years,  albeit with a few conditions.

In its IR35 guidance note, published on May 9th, HMRC adds: “We will not open an IR35 review until after the tax year has ended. You can take the [IR35 business entity] tests looking back over a period if you wish.

“But, if you do not take the tests for a tax year until – some time afterwards – we open an IR35 review into that year, you may find it harder to gather the evidence to support your answers.”

The Revenue advises that what constitutes “enough relevant and reliable” evidence from a contactor or their advisor, to help determine a risk-banding will “of course depend on the facts of the case.”

“With each test, we have given examples of the kind of evidence you could use to show that you have passed it,” HMRC said, pointing to its 47-page guidance note on the legislation, which has not changed since it was introduced in 2000. “But these are examples, not requirements. We will be willing to accept other evidence if it is satisfactory.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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