Contractors facing IR35 investigations can be forced to wait many years until their IR35 case is eventually resolved, whether that resolution be directly with HMRC, through the tax tribunals or the courts. And because the IR35 legislation is so opaque, there is little or no certainty about which way an investigation may go, which means the long wait for a resolution can be stressful,
But just why are contractors left ‘dangling’ for so long? According to Andy Vessey of Qdos Consulting, there is no single reason: “IR35 cases can stretch out over several years or more, and there are usually a number of factors adding to the delays. Typically, this is because cases can be complex and depend on expert interpretation of evidence, which takes time to gather.”
Adding ‘soft’ variables such as the personalities of the HMRC inspector, the contractor and their agent, plus the speed and efficiency of the client and agent, who both play a significant role in an IR35 case, can easily add weeks and months to the process.
The discovery process can take up to 12 months or more
“The first stage in an IR35 investigation is information gathering by the HMRC inspector leading the case,” continues Vessey. “An investigator will want to know the details about each contract for every tax year being investigated. That means that if a contractor is under investigation for several tax years, each with multiple contracts, then a considerable amount of information must be gathered from the contractor, their client and agency.”
And according to Vessey if the contractor or their agent choose to deal with the process purely by correspondence, rather than through meetings, a simple exchange of letters to answer a basic question of fact can take months.
Clients involved in the various contracts being investigated can also add delays. Vessey explains: “Because the inspector will want to understand the exact nature of the real working relationship between contractor and client, the client is typically sent a questionnaire with as many as 150 questions to answer.”
This can extend the investigation timeline in a number of ways. If the client responds promptly, the inspector may have further questions based on the client’s responses, and even more questions on those responses. But often the client the contractor actually worked for will pass the inspector’s questionnaire to the human resources, or legal or procurement teams in the company, who may choose not to reply at all, or only to reply in very guarded terms that are unhelpful to both sides.
Personalities can impact on schedules
“Another key factor is the personalities of those involved, particularly that of the inspector, the contractor and their agent,” says Vessey. “Particularly stubborn or tenacious inspectors, with support from their HMRC managers, have been known to insist on taking cases right through to their conclusion in the courts, even if the evidence is weak.”
Vessey confirms that nowadays the scope for ‘maverick’ inspectors is much reduced, as the tax tribunal system which came into force in April 2011 allows taxpayers to request an independent review, albeit from an ‘independent’ HMRC inspector. But that fresh pair of eyes has sometimes found in favour of the taxpayer.
Particularly stubborn or tenacious inspectors, with support from their HMRC managers, have been known to insist on taking cases right through to their conclusion in the courts, even if the evidence is weak
Andy Vessey, Qdos Consulting
“It’s not always the inspectors fault,” notes Vessey, who says that contractors can sometimes be their own worst enemy: “An uncooperative contractor can refuse to answer reasonable questions from the tax inspector until compelled, or their agent can drag their heels in responding. Each delayed response could add a month to the process, which over the course of an entire investigation can easily amount to an extra six months to a year.”
Tribunal and court logistics take time to organise
Many older IR35 cases that hit the headlines have worked their way through the old-style system of the general and special commissioners. Now that the more streamlined tax tribunals are in place, Vessey expects cases to take much less time, and to potentially be much fairer for contractors.
He explains: “Tax tribunals are now run by an independent judge who is an expert in taxation, whereas previously the general commissioners were drawn from the business community and often eyed by contractors with suspicion because of their close working relationship with local HMRC inspectors.”
Although the new system has been designed to be fairer and more independent from HMRC, the sheer logistics of getting inspectors, the contractor, multiple witnesses and counsel in one place at one time can still take months to organise.
“The tax tribunal process should speed up the time it now takes to hear IR35 cases, and it is possible that any new IR35 administration strategies emerging from the IR35 Forum could further improve the process. However,” concludes Vessey, “the best way contractors can avoid lengthy IR35 cases is to ensure they have adequate expert advice from the outset and quash any investigation before it gains momentum.”