Why the taxman’s IR35 scrutiny of individual contractors is far from over

As the non-starter IR35 case of ‘The Trainline two’ shows, the contractor industry continues to see HMRC enforcing the IR35 rules for limited company workers prior to April 6th 2021, when it was a contractor’s responsibility to assess their own IR35 status, writes Matt Fryer, group compliance director at Brooskon.

Less enforcement, but still enforcement

However the volume of HMRC enforcement is significantly lower than a few years ago. This reduction is not surprising given the compliance cycle for periods prior to April 2021 still hasn’t been completed. We also haven’t seen evidence of HMRC ‘targeting’ contractors working for a particular end-client, and I too suspect (and hope) that the two contractors both being on-contract with The Trainline is coincidental.

Despite the case raising eyebrows, it is actually not uncommon for HMRC to close an enquiry following submission of information post-their initial request and approach. But it is worth appreciating that HMRC will invariably want to test the responses provided during initial correspondence with supporting documentation and/or information from the other party, (e.g. the end-client, after initial correspondence with the contractor; or vice versa).

Out with your accountant's old adage, in with your best case early

As is now abundantly clear, HMRC requests a significant amount of information early in the IR35 enquiry process. This is to enable them to close ‘clear-cut’ enquiries quickly.

But contractors should take note -- the old adage in accountancy circles that it’s ‘best to tell the taxman as little as possible’ (or even ‘what HMRC doesn’t know won’t hurt it’) in response to the questions, doesn’t work in IR35 investigations. On the contrary, contractors should put their best case forward at the earliest opportunity with supporting evidence. Note however – this presentation should be handled tactfully, and be very carefully worded to avoid misinterpretation or, worse, having your words construed against you!

Getting a professional in your corner early on in any IR35 enquiry, is essential. As a contractor, it could save you a lot of time, energy and stress; as well as keeping you focused on what’s important. Specifically, it’s vital to keep yourself balanced in terms of your prospects of successfully defending your position.

Where individual contractors will remain in HMRC's cross-hairs

The bigger picture is that we are likely to see HMRC continuing to enquire into a contractor’s IR35 position under the ‘old’ rules -- until January 2023 at the earliest, given income derived from pre-April 2021 contracts will be reported on the 2020/2021 self-assessment tax return, which require submission prior to January 31st 2022 from which HMRC then has 12 months to open an IR35 enquiry.

But HMRC’s scrutiny of individual contractors under the Intermediaries legislation will actually go way beyond April 2023 for those limited company workers supplying a “small” client.Contractors should therefore continue to be wary of their own obligations, although so far we have not seen any evidence that HMRC is using information gathered from end-clients to target this activity. It’s nice to see the taxman sticking to his word, even if contractors do feel that their card has already been marked.

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Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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