What contractors now need to know about IR35
That’s because HM Revenue & Customs has been piloting its new IR35 processes and these are currently subject to a full review and evaluation.
HMRC with the IR35 Forum are expected to produce a full report on what has been good and bad about the new processes and decisions will then be made on the findings. So the changes over the last 18 months are not set in stone.
Watch out for changes to the ‘service company’ questions on tax/RTI returns
The anticipated review of IR35 by the taxman will also take on board comments made in the House of Lords (HOL) report on the use of Personal Service Companies. The government’s response to the HOL included looking at the service company questions on the SA100 and the RTI end of year declaration (previously P35). Responding to these questions has never been compulsory so it is impossible at the moment to gather much meaningful information from the answers given.
A letter from HMRC headed “Business Records Check” is an IR35 enquiry
Whatever the heading on the letter, if HMRC are asking about IR35 and if you have considered it, then do not be fooled; you have an IR35 investigation on your hands. Our firm is currently seeing individuals and their advisers thinking they have a very low-level, innocent request from HMRC to check some of the individual’s business records. Yes, this may not be a full blown Employer Compliance Review but as IR35 is probably the most costly thing you could get wrong, you should take this extremely seriously.
Take care with your business expenses
The early days of the new IR35 processes used to concentrate on IR35. Cases we are seeing now show that HMRC are also asking about other areas, such as full details of all a contractor's expenses linked to a particular engagement. We have also seen requests for breakdowns of Directors’ loan accounts. Clearly if another risk (other than IR35) has been identified by HMRC they will use the same enquiry to investigate.
What to expect once an enquiry has started
You will need to provide a lot of information and documents
We have taken up a number of ongoing enquiries recently where contractors or their advisers have responded to the IR35 question by simply referring to clauses in their agency contract, with replies to HMRC akin to IR35 does not apply to me because “I can send a substitute” or “I am not controlled” or “I do not get holiday or sick pay.” This is a wholly inadequate response and a complete waste of time. Arguably such a response also shows a lack of understanding of IR35. HMRC already knows that you have treated your income as outside IR35 and you have declared everywhere that you have considered IR35. Providing a robust technical submission at the outset is the correct approach.
HMRC will want to meet with everyone including the end-client
HMRC will want to gather as much information as possible and from everyone involved in the contractual chain. They are likely to approach you or your agency to seek sight of the upper contract and they are likely to want to meet your end-client to confirm that everything you have told them is accurate. HMRC prefers face-to-face meetings but they do not have the powers to force attendance.
Preparation, preparation, preparation
The quicker you provide the required information the sooner the enquiry will be complete. Ideally you should have been taking IR35 very seriously from the first day of contracting. If you have had your contracts and working practices reviewed and hold something in writing to support an outside IR35 position, then now is the time to produce it. You should always attempt to make contact (if you have moved on) with the person you reported to at the end-client. A confirmation of working arrangements is useful at any time.
There is lots of help available to you either by way of your accountant or through specialist providers. Your case can be concluded very quickly when a robust technical submission is put to HMRC and backed up with appropriate evidence. IR35 enquiries are very stressful so it is far better for everyone to put them to bed as quickly as possible.
What is your risk profile?
HMRC will not share details of how they target for IR35. From the cases we are seeing, the following risk pointers are currently apparent:
- Public Sector – some 50%-plus of our cases are where the end-client is the Public Sector
- High Earners – perhaps HMRC sees greater yield here
- Other issues – perhaps another tax/NIC issue, such as high expenses is identified before any IR35 risk so they simply put IR35 'into the pot.'
- Always keep on top of your own IR35 position by ensuring your working practices AND your written contracts demonstrate the opinion you have reached.
- Don’t ignore any brown envelopes that land on your doorstep!
- Always keep abreast of new IR35 developments.
- Seek help when you need it.
Editor's Note: Further Reading -