With IR35, what contractors' clients say still matters most

We might be on the cusp of change as an IR35 consultation is due to outline how the government wants to revise off-payroll working rules, but one thing is holding true in two IR35 investigations we’ve defended this year: the importance of end-client evidence, writes Kate Cox, employment status manager at Qdos Contractor.

In one of the cases which involved a dual-director contractor company, the IR35 win for them as the taxpayer came in no small part due to both end-users who HMRC probed supporting the contractors’ outside IR35 status.

With private sector IR35 reform on the horizon, it’s auspicious that both end-clients were supportive of the contractors in claiming that IR35 did not apply. The evidence of the clients – which insisted they did not exercise control over the director-duo, was pivotal. It highlights the importance of joined-up thinking when an IR35 inspector calls.

In the second IR35 case, which began back in November 2018 but which we shut down for the contractor in January 2019, the end-client evidence was determinative too. In particular, one contract of the contractor’s was deemed by HMRC as outside IR35, based solely on the evidence which the end-user provided. HMRC requested both a working practices questionnaire and a face-to-face meeting with the end-user. It’s clear the Revenue gives considerable weight to what end-users say.

Moreover, what engagers don’t say can prove conclusive too. In fact, in the second case, a formal complaint was lodged against HMRC due to a lack of information on the part of the Revenue. The case closed shortly thereafter, mainly because the tax authority could not establish the facts with regard to the contractor’s second client.

Establishing the facts of engagement, if you are an end-user whose evidence HMRC might call upon, is going to get a lot easier if the Revenue’s ‘guinea pig’ blanketing model takes hold. In short, HMRC has said that once a client reviews the working practice and T&Cs of a single of their PSCs, the conclusion on IR35 for that one PSC can be extended to all the client’s other PSCs, as long as the working practices and T&Cs are the same.

In theory, two contractors with identical T&Cs and crucially; working practices, should have the same IR35 status. In that sense, the HMRC stance – outlined at the latest IR35 Forum meeting -- is technically correct. But in practice, we believe it’s a dangerous game to play.

An IR35 enquiry will look to establish whether the contractor is genuinely in business on their own account, covering not only the specifics of a particular contract but also the manner in which the individual operates their business -- factors which are likely to be unique to them. So IR35 ‘blanketing’ based on similar sets of circumstances risks glossing over or ignoring important details which could feature in an IR35 enquiry further down the line.

Lastly, it’s also important for engagers – the party still ruling the roost in IR35 investigations, to have a clear and substantial audit trail, which we don’t believe generic determinations afford room for. This is naturally important in the event of HMRC compliance activity, but also for any potential future action from contractors themselves. So please proceed HMRC with the age-old focus on what clients submit, but we say rethink the model you’re approving them to use, currently in the public sector and presumably from April 2020 too.