The letters to 1,500 contractors using personal service companies (PSCs) are classic HMRC scaremongering: sent on a mass scale with no detail and no appreciation for the law on employment status. As well as being unsigned, the letters are not even sent from a named person.
The only grounds for HMRC’s belief that each and every PSC it has written to is caught by IR35 is the following statement:
“After looking at the information we have for the 2018 to 2019 tax year, our view is that the contract between your PSC and GlaxoSmithKline (GSK) comes under the off-payroll working rules ‘IR35’.”
Clearly HMRC has put no effort into ascertaining the facts of a particular engagement to give a firm opinion before writing to 1,500 contractors. Even worse, the passage above references the contract between your PSC and GSK.
Those PSCs that contacted us at Chartergates are all providing services via an intermediary such as an agency and therefore do not have a contract directly with GSK. So, the only crumb of substance to this letter is fundamentally flawed.
Worryingly, the letter states that a PSC that is caught by IR35 must operate PAYE every month. This is simply not how IR35 works in the private sector. The application of IR35 involves a ‘deemed payment calculation’ at the end of each tax year, not monthly PAYE deductions.
We called the number on the letter to discuss this with the Employment Status and Intermediaries Team, but there was nobody technical from HMRC to speak to on the number given, only an offer to pass on enquiries to the ‘Project Team’. At the time of writing we are still waiting for the ‘Project Team’ to get back to us.
What makes HMRC’s actions even more nonsensical is that it has already pursued a PSC providing services to GSK all the way to the first tier tax tribunal. Of course, the facts of every case can be different (although HMRC seem to believe all 1,500 PSCs are the same) but you would have thought that the resounding defeat HMRC received in the FTT (delivered by Chartergates’ Matt Boddington) in the case of Primary Path, would have given them pause for thought.
Alas, it appears not – so how should PSCs or their accountants respond to HMRC?
The letters are riddled with errors, short on detail and light on facts. However, these shortcomings have not prevented HMRC from drafting them in a threatening and scaremongering tone.
The letters will likely cause concern for those that have received them and make no mistake, that is by HMRC’s design.
HMRC has, for many years now, followed a simple but effective method:
- Select a target group
- Send target group threatening but vague letter
- Wait for the majority of recipients to innocently believe HMRC’s unsubstantiated claims
- Collect additional taxes from those that innocently believe HMRC’s unsubstantiated claims – unchallenged and with minimal effort
- Potentially enquire into those that do not take HMRC at face value
The tactics employed by HMRC achieve maximum gains for minimal effort. That does not make it right, but it is important to recognise the tactics so that we can scrutinise the current letter in the correct light.
What should you do?
The letters from HMRC are a common tactic from what is known as the “nudge unit”. That does not mean that they should be ignored. The Primary Path case was decided on its facts and the contracts in place at the time, so agents for the PSCs should review the facts and contracts of their particular case as well.
HMRC’s letter may be light on detail, but PSCs should be exploring and embracing the detail so that they are able to adequately defend their position should HMRC follow up on its threat.
The letters we have seen fall short of a full enquiry letter or a formal information request (although you could treat it as one and put the ball back in HMRC’s court), and therefore there is, in our opinion, no compulsion to respond.
What PSCs should be doing as a matter of priority is getting their ducks in a row and assessing their contract and facts for IR35.