Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Has IR35 improved two years on?

by
13th Jun 2014
Save content
Have you found this content useful? Use the button above to save it to your profile.

Two years ago HMRC announced a new approach to IR35 to improve the administration of the contractors' tax. Qdos' senior tax consultant Andy Vessey looks at how the initiative has evolved.

Rather than reforming IR35, the more limited objective of improving its administration revolved around producing new guidance that included the business entity tests (BETs) and example scenarios.

The IR35 helpline was supposedly improved, offering a three-year "get out of jail" card where a contract is deemed outside of IR35 by HMRC and the arrangements remain largely unaltered when the Revenue select a freelancer for enquiry. Despite HMRC's reassurances that the helpline and review service remain independent of the compliance teams, very few people have been inspired to use it.

Those who have turned to HMRC's review service were probably been forced into doing so by ill-informed public sector organisations seeking reassurances about a contractor’s IR35 status following the Treasury's clampdown on public sector appointees in 2012.

April 2013 saw the IR35 legislation extended to those contractors who were fulfilling office holder roles via their own personal service companies (PSCs), although there appears to have been little activity by HMRC in this area.

Most recently, the House of Lords Select Committee on PSCs conducted its own investigation into IR35 and came up with a list of conclusions and recommendations as to how this awkward piece of legislation could be better administered and policed.

IR35 enquiries

IR35 compliance reviews are now more targeted and driven by new, specialist teams based in Bradford, Croydon, Edinburgh and Salford.

In years gone by, IR35 enquiries usually arose off the back of employer compliance reviews and could take years to conclude. Now, however, as part of HMRC's revised approach IR35 compliance checks are supposed to be more direct. They start with an initial review letter requesting:

  • A breakdown of the PSC's income for a tax year(s) or an accounting period(s)
  • Copies of all contracts that give rise to that income
  • Breakdown of expenses, usually travel
  • Evidence and information that supports a freelancer's opinion that their contract(s) is/are outside of IR35.

Where the IR35 evidence meets HMRC's requirements, the department will not only close the enquiry but also give the business an assurance that it will not open another review for the next three years.

What is involved in an enquiry?

At the outset of the enquiry, the contractor should be asked to undertake the BETs and inform the tax adviser of the result. Chances are that the score will fall in either the high or medium risk categories. However, should the contractor achieve a low risk score and offer evidence to their freelance status, HMRC will shut down the enquiry immediately.

BETs are only the beginning though, and the process fails to address all the relevant employment status factors.

Should a contractor not emerge from the tests as 'low risk', they then need to assembling all the contractual and - more importantly - working practice details to clearly demonstrate that the contract(s) falls outside of the intermediaries legislation.

Once it has seen the initial evidence HMRC will then decide whether or not it is sufficient, if further information is required, or if parts of the evidence need to be tested.

Where further information is needed, HMRC generally invites the taxpayer to a face-to-face meeting, or holds a telephone interview. Just like any other client, advisers will usually know whether exposing them to Revenue officials will be a help or hinder - and the client themselves may not relish the prospect.

HMRC cannot insist on a meeting, and if the client so wishes, future matters can be dealt with by correspondence.

Initial meetings however should hold no fear for the freelancer as they are usually conducted by two compliance officers who are simply there to gather information. One asks the questions while the other takes notes.

Most of the questions are straightforward but the adviser should always be in attendance to hold their client's hand and to intervene where necessary if it appears HMRC are leading the contractor up a certain path.

In their opening correspondence HMRC will also ask for contract details of end users. Avoid giving this information until it is absolutely necessary, ie if and when HMRC decide they need to contact the end client to verify facts and evidence. At that point the adviser needs to try to manage the situation as best they can. If possible, try to establish a relationship with the end client contact and offer assistance.

The aim here being not to manipulate the truth, but to advise the end client on status issues and terminology they may not be aware of.

Where the end client agrees to a meeting with HMRC, the contractor or their adviser is unlikely to be invited along unless the end client permits it. This situation is rare as end clients tend to be precious over 'confidential' information they are relaying to the Revenue.

Pre-meeting coaching is vital in these circumstances as the end client will be at the mercy of HMRC officials.

For the past 18 months or so, HMRC have been true to its word and shutting down enquiries early where satisfactory evidence allows. However, in recent months some status inspectors have been reverting to type and digging their heels in despite the evidence laid before them.

Case study: IR35 enquiry 

In one recent enquiry, the contractor provided their services under a four-way agreement to a government department under which the freelancer was sub-contracted by a third party that held the contract with the department.

After exchanges of correspondence and a meeting between HMRC and the contractor, the Revenue accepted that the third party controlled the project and that they would be a suitable source of evidence on the contractual relationship. A meeting then took place with that third party, who was extremely supportive of the freelancer. Game, set and match you would think?

Not so, as HMRC's status inspector decided to prolong the enquiry, exhibiting an attitude that was criticised by the judge in the Special Commissioners case of MAL Scaffolding (SPC00527), viz: “The Commissioners appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking.” Needless to say this precedent was brought to the inspectors' attention, along with a timely reminder to be mindful of the Taxpayers Charter.

In a bid to reduce the number of delays in cases HMRC signalled that it would powers under Sch 36 FA 2008 at an early stage to obtain the information it required.

Again, the department has honoured that commitment but a little too zealously at times. Gone are the days where an adviser could pick up the telephone and request an extension of time to respond. HMRC will, in the main, be sympathetic towards such a request, but this will be at the expense of having an information notice served on the client.

HMRC however can be selective in its use of Sch 36 powers. In another case I was involved with, the contractor provided his services to a government agency. HMRC decided it needed sight of a work order in the possession of the agency. We waited patiently for a good number of months until I eventually challenged the status inspector as to why HMRC had not issued an information notice to secure the document.

The answer, of course, was political, as one government department did not want to exert such pressure on the other. This was completely unacceptable as it smacked of 'one rule for one and one for another'. A complaint was lodged on this basis.

The majority of IR35 enquiries have involved contractors operating within the public sector, but over recent months freelancers who ply their trade in banks and large financial houses, large national and multi-national companies are now coming under the microscope.

We could be now be seeing HMRC taking a firmer stance. It may take longer to repeat those earlier victories, but with strong evidence, particularly supported by the end client and expert advice, the freelancer can still triumph.

The absence of IR35 tax tribunal cases over the Past few years demonstrates that HMRC may be as reluctant to progress an appeal to tribunal as the contractor. With this in mind you can call HMRC's bluff as a last resort, but be prepared to back it up should the Revenue oblige you, as it can be an expensive mistake.

Tags:

Replies (24)

Please login or register to join the discussion.

By JCresswellTax
13th Jun 2014 14:02

Good article

But although I follow this closely, I would leave the IR35 enquiries to the experts, without a doubt...

Thanks (0)
avatar
By Philipredhead
13th Jun 2014 17:30

IR35 GP Locums

I am still amazed that HMRC have not challenged any GP Locums trading through Ltd Companies over IR35 or even looked bin detail at non agency self employed locums for employment status!

 

Thanks (0)
avatar
By GR
13th Jun 2014 20:26

And the moral of the story..........

ask your contractor clients to get their contracts reviewed by Andy at Qdos.

Thanks (0)
avatar
By njpandya
13th Jun 2014 21:14

Lot to do

Good & informative article; however I seriously believe there appears to be case where Govt. knows who is doing what but reluctant to take any action and keep posting these articles to keep public in loop that they are serious about tax & IR35. 90% too strong word I know are working in London for one organisation/client only; what surprise me the most is like CIS industry HMRC MUST start charging IT Industry Tax at Source & ask the director's of the company to pay that tax every quarter; mentioning name of the end beneficiary client/group they worked for (not an umbrella/psc jokers agents). This would help HMRC not only to track which companies these people are working for and how long with;but also provide liquidity.

The main question to ask is does HMRC have any intentions of doing this or just wanted to create some noise about IR35 followed by silence....

Thanks (0)
Replying to Duggimon:
By JCresswellTax
16th Jun 2014 09:56

I can't even be bothered going into detail

njpandya wrote:

Good & informative article; however I seriously believe there appears to be case where Govt. knows who is doing what but reluctant to take any action and keep posting these articles to keep public in loop that they are serious about tax & IR35. 90% too strong word I know are working in London for one organisation/client only; what surprise me the most is like CIS industry HMRC MUST start charging IT Industry Tax at Source & ask the director's of the company to pay that tax every quarter; mentioning name of the end beneficiary client/group they worked for (not an umbrella/psc jokers agents). This would help HMRC not only to track which companies these people are working for and how long with;but also provide liquidity.

The main question to ask is does HMRC have any intentions of doing this or just wanted to create some noise about IR35 followed by silence....

How wrong the part of your comment iv bolded is...

Thanks (0)
Replying to WhichTyler:
avatar
By njpandya
16th Jun 2014 12:15

As if we are bothered to read what you've bold

Refer subject....

Thanks (0)
avatar
By johnjenkins
16th Jun 2014 11:04

Anthing to do

with IR35 is wrong. Legally there is no definition of employment status. Guidelines for employers, yes, but nothing else. So IR35 is a nonsense which goes against company law. The beauty of it is, it is always the client that controls not the contractor. So any new measures surrounding control are doomed before they get off the ground.

Thanks (1)
avatar
By j.arbuthnott326
16th Jun 2014 12:41

IR35
I find it depressing that individuals who take on the risk of being self employed
(no automatic monthly salary, pensions, holiday pay, redundancy, sick pay, death in service insurance) are being hounded by the HRMC. They fulfil a vital role in the economy providing real expertise and experience , the knowledge to mentor staff and most importantly of all providing companies with short term and flexible resourcing as and when required without the overhead of permanent staffing

Thanks (5)
Replying to Ermintrude:
By JCresswellTax
16th Jun 2014 13:02

100% This

j.arbuthnott326 wrote:
I find it depressing that individuals who take on the risk of being self employed (no automatic monthly salary, pensions, holiday pay, redundancy, sick pay, death in service insurance) are being hounded by the HRMC. They fulfil a vital role in the economy providing real expertise and experience , the knowledge to mentor staff and most importantly of all providing companies with short term and flexible resourcing as and when required without the overhead of permanent staffing

Which is why the above statement above from some about advance quarterly tax makes no sense at all...

Thanks (0)
avatar
By ds
16th Jun 2014 15:06

This is all very well and good...

and having a nice cosy chat with Revenue operatives over a cuppa, all very well and good too but is there any legal requirement to play along with the Revenue in these investigations? Quite frankly I've better things to do and if they want to investigate then let them go ahead but all the info they requested was lost when a water pipe burst last winter and the paperwork was water damaged and had to be disposed of. The accounts are still available and already filed with them and at Companies House, they can get bank statements directly from the bank and check that the income was correct. Go on then investigate, I've got work to do which will generate profit from which they will get their legal share. If I have to stop work to help them with their enquires then they will get less tax, is that what they really want ?

Thanks (0)
Replying to tonyaustin:
By JCresswellTax
16th Jun 2014 17:22

I suppose that depends

ds wrote:

and having a nice cosy chat with Revenue operatives over a cuppa, all very well and good too but is there any legal requirement to play along with the Revenue in these investigations? Quite frankly I've better things to do and if they want to investigate then let them go ahead but all the info they requested was lost when a water pipe burst last winter and the paperwork was water damaged and had to be disposed of. The accounts are still available and already filed with them and at Companies House, they can get bank statements directly from the bank and check that the income was correct. Go on then investigate, I've got work to do which will generate profit from which they will get their legal share. If I have to stop work to help them with their enquires then they will get less tax, is that what they really want ?

On whether HMRC have to prove you fall inside IR35 or whether you have to prove you fall outside!

Thanks (0)
Replying to SXGuy:
avatar
By ds
18th Jun 2014 13:35

But where lies the onus ? Why should I prove anything ?

If I am using a legally sound limited company solution and pay all due taxes and comply with all paperwork, PAYE and on-line accounting systems then why should I have to prove anything ? I am obeying the Law as it stands, surely it is up to Revenue to bring a case and prove it in court that I am behaving unlawfully and not for me to help them with that. As mentioned elsewhere IR35 seems to be dead in the water as making that case is fraught with difficulties.

Thanks (0)
avatar
By User deleted
16th Jun 2014 20:25

All this would go away ...

... if they abolished NI and re-jigged tax to counter it!

Thanks (1)
avatar
By johnjenkins
17th Jun 2014 09:40

Come on OGA

simple and HMRC don't really go together do they?

I've not seen one credible argument from the government as to why it can't be done.

All we hear about is "disguised employment". I wonder who created that phrase. 

Thanks (0)
By ShirleyM
17th Jun 2014 09:57

I often wonder .....

IR35 is meant to catch 'employees' who work freelance.

I wonder exactly how many of these freelancers told their employer they didn't want to be employed any longer and insisted on going freelance, and how many employers had employees on short/long term employment contracts and decided not to renew and engaged freelancers instead (but insisted upon them operating through a ltd co)?

Thanks (2)
avatar
By njpandya
17th Jun 2014 10:34

Escapism

"Which is why the above statement above from some about advance quarterly tax makes no sense at all..."

For that one needs to have a sense of vision, attitude & wisdom. People are more afraid to acknowledge how they are playing with instruments & vehicles like self-employment & PSC's. Majority of them are b*llocks & someone said they generate employment; yes that's right no one is arguing about that; problem is employment is generated only between Husband & Wives & accountants know this very well....Ofcourse for people like this advance tax wouldn't make sense at all but super profits & dividends makes all sense..b*llocks..

 

Thanks (0)
Replying to Accountant A:
By JCresswellTax
17th Jun 2014 11:22

I think its quite clear

njpandya wrote:

"Which is why the above statement above from some about advance quarterly tax makes no sense at all..."

For that one needs to have a sense of vision, attitude & wisdom. People are more afraid to acknowledge how they are playing with instruments & vehicles like self-employment & PSC's. Majority of them are b*llocks & someone said they generate employment; yes that's right no one is arguing about that; problem is employment is generated only between Husband & Wives & accountants know this very well....Ofcourse for people like this advance tax wouldn't make sense at all but super profits & dividends makes all sense..b*llocks..

 

From your posts on this topic and other threads that you certainly have an agenda against PSCs.

Thanks (2)
Replying to Accountant A:
avatar
By GazCol
17th Jun 2014 11:48

wow.

njpandya wrote:

"Which is why the above statement above from some about advance quarterly tax makes no sense at all..."

For that one needs to have a sense of vision, attitude & wisdom. People are more afraid to acknowledge how they are playing with instruments & vehicles like self-employment & PSC's. Majority of them are b*llocks & someone said they generate employment; yes that's right no one is arguing about that; problem is employment is generated only between Husband & Wives & accountants know this very well....Ofcourse for people like this advance tax wouldn't make sense at all but super profits & dividends makes all sense..b*llocks..

 

I think this is the most ill-educated response I've ever read to a subject on AW, and that's some going. Is that you Hector?
Thanks (1)
Replying to Accountant A:
avatar
By User deleted
17th Jun 2014 13:29

And what is wrong ...

njpandya wrote:

"Which is why the above statement above from some about advance quarterly tax makes no sense at all..."

For that one needs to have a sense of vision, attitude & wisdom. People are more afraid to acknowledge how they are playing with instruments & vehicles like self-employment & PSC's. Majority of them are b*llocks & someone said they generate employment; yes that's right no one is arguing about that; problem is employment is generated only between Husband & Wives & accountants know this very well....Ofcourse for people like this advance tax wouldn't make sense at all but super profits & dividends makes all sense..b*llocks..

 

... with trying to keep as much of your income as possible? Especially when all politicians of any shade have no clue of pretty much anything, they certainly aren't fit to decide how to spend billions of tax revenue in a wise, efficient and controlled manner.

If tax revenues were spent in a targeted, well thought out constructive manner to ensure young people were properly trained in skills that were needed; investment was made in proper infrastucture based on sound and researched economic studies; our businesses were actively defended from the bureaucratic red tape dross spewed out by an unelected european commission; state assistence was given solely to those in genuine need who have lived in this country for more than a few days; and the rights of the law abiding tax paying silent majority were given preference over the those of a vocal minority of crackpots and psychopaths, then people may not be quite so adverse to paying tax!

Thanks (5)
avatar
By johnjenkins
17th Jun 2014 10:36

@shirleym

Does it really matter. The crux of the situation is that there is no law that decides employment status yet HMRC are trying to create one through the back door. If government want to take on the responsibility of employment status then they should do so and make laws accordingly. They won',t because chaos means more money for them. It's nothing to do with what is right or wrong, it's all about how much money they can rake in without raising the basic rate so it doesn't look bad for them.

Thanks (0)
avatar
By johnjenkins
17th Jun 2014 13:17

@OGA

I just stood up and applauded your post. (I'm not joking or taking the pee). You are so right and it won't be till next May that it will sink into this Government.

Trade Unions can strike, what can taxpayers do? Elect a totally different party in the hope that those with superiority complexes may realise what they have done.

Thanks (1)
Chris M
By mr. mischief
18th Jun 2014 11:07

The solution is easy

The solution to this IR35 mess is actually very easy but there is no chance any Government will take it anytime soon.  The people who create the situation where large chunks of the workforce use PSCs are not the little guys, they are the big guys.

Locally this is predominantly large employers such as Sellafield, the Nuclear Decommissioning Authority and so on.  All of which are either actually part of the public sector or one step removed via a cost-plus contract which costs all taxpayers an arm and a leg.

Those guys should have all the responsibility for checking employment status and the rest, just like in the Construction Industry Scheme.  If one of my Sellafield clients has a contract review which comes back with a couple of suggested changes there is no way he or she can call up the agency and ask the agency to ask, for example, Sellafield Limited to change the wording.

Ten or twelve years ago this was on the table.  But as with the laughable review of the IFA sector in 2013, the big guys moved in and so all the responsibility and cost of IR35 falls on the little guys.

The solution is easy peasy but will never occur.

 

Thanks (1)
Chris M
By mr. mischief
18th Jun 2014 17:32

Alive and kicking

IR35 is most certainly not dead in the water.  Perhaps there have not been any high profile cases for a while, but there are 9 or 10 cases locally I know about.  None in my client base thankfully.  I am also aware via some of these clients that colleagues of theirs - who foolishly had decided to risk it by not getting tax investigation insurance - coughed up chunks of tax during 2013.

IR35 jobs are "How long is a piece of string?"  You answer one set of questions, 10 more come back at you, you answer them, etc.  After a few of these one of two things seems to happen locally:

1.  The HMRC guy realises the victim has insurance.  (If I had an IR35 case I would tell the HMRC guy this by phone on the first letter so he or she knows it's a dead duck.)

2.  The victim is not insured and realises he or she is going to have endless letters, at great expense, over the next few years.  He or she cuts losses by coughing up all or some of the tax, whatever the deal they can do.

Thanks (1)
avatar
By ds
18th Jun 2014 19:19

but isn't the onus still on HMRC to prove their case?

Insurance is obviously a good idea and even better for the insurance company if it never has to pay out. I also have no doubt that many accountants practices sell this and no doubt make a commission on it too. What you seem to suggest is if you haven't got it you should cave in at the first hurdle and not put up any resistance and let them off the hook to actually prove their case in court. Even if you have it, there must be a limit to what the company will fund. Rather like insuring a car, they would often prefer to write it off than carrying out the repairs.

Thanks (0)