HMRC finally close year-long IR35 enquiry
HMRC last week ended the year-long ordeal of two contractors who worked through the same limited company, who were being chased for over £100k in unpaid PAYE tax and National Insurance under the IR35 rules whilst being able to clearly demonstrate working on a self-employed basis.
The contractors, with the full collaboration and approval of their client companies, managed to exercise the one right that almost automatically puts any contractor “outside IR35”: the right of substitution. If your company can send a substitute worker in your place, it becomes very hard for HMRC to argue that you are, in fact, an employee. In most cases, the mere existence of a right of substitution clause across the contractual chain, agreed by the client company, is enough to make “inside IR35” status almost impossible to claim – however, in this case, the contractors in question actually did send substitutes, and on a regular basis. In addition, the contractors’ legal advisers claim that both end-clients did not have enough control over how, where and when the contractors did the work for an “inside IR35” assessment to be made on the basis of control either.
Nevertheless, following a failed corporation tax enquiry into their company by HMRC in 2017, the taxman then launched an IR35 enquiry into both directors – an enquiry that should have been easy enough to resolve, given the nature of their engagements, but HMRC protracted the investigation out over 12 months, causing unnecessary stress and uncertainty for two contractors that had been operating completely legally – as finally accepted by HMRC last week. They didn’t even explain why the enquiry had been dropped.
The contractors’ legal advisers have used the case to cast doubt on HMRC’s current IR35 strategy, and it does seem in this case that they have severely mis-targeted their investigation, then instead of accepting their mistake and closing the case, they doubled-down on their initial error, wasting a year’s resources trying to justify the decision.
“Chaos and disorganisation” at the Revenue was cited as a possible reason for the misguided enquiry by Qdos Contractor, who make the very good point that even the taxman’s much-criticised online status checker, CEST, would have returned “outside IR35” results for both contractors, enabling a much quicker resolution. It remains unclear whether the tax inspectors utilised CEST or not, but if they did, and then ignored the result because it didn’t suit them, that would be troubling. If they didn’t use it because of concerns over its accuracy, that would also raise questions, given how much confidence they claim to have in it publicly.
Questions are also being asked as to whether it was coincidence that the IR35 investigation was launched subsequent to the failed corporation tax enquiry.
The good news for contractors is that a properly structured arrangement, in co-operation with end-clients and, where appropriate, agencies, can drastically mitigate IR35 risk. In this case, the client companies were said to be very supportive of the contractors’ wish to structure the arrangement in an “IR35-friendly” manner. They could not, however, prevent a year-long investigation with the associated administrative burden and stress. With the roll-out of Off-Payroll IR35 rules to the private sector pencilled in for next year, liability will shift to engagers, and both contractors and clients will be able to take some positives from this case. IR35 can be effectively managed, if well understood and the appropriate steps taken, even with HMRC in apparent disarray.
21st February 2019.