Contractors and interims working in the public sector are being actively targeted by HMRC’s IR35 unit, which is most likely using intelligence generated as a result of the 2012 Treasury review of public sector off-payroll arrangements.
“Never before has there been so much intelligence available about contractors working in the public sector,” says Andy Vessey, Qdos Consulting’s IR35 expert. “The review in May 2012 identified thousands of public sector contractors, and HMRC is putting that information to use.”
Vessey is speaking from first-hand experience, as he is currently supporting numerous contractors facing HMRC IR35 reviews; what they have in common is they are public sector clients. Vessey is unsurprised, noting: “The latest minutes from the IR35 Forum flag the renewed emphasis of HMRC targeting public sector contractors.”
He also warns that contractors should review their tax investigation insurance arrangements: “Most of the public sector contractors who have come to us recently have no insurance and are paying consultancy rates as a result. This adds to the stress and expense of HMRC’s IR35 reviews.”
HMRC’s public sector blitz was predictable
Vessey has represented many public sector contractors over the past 12 years since IR35 has been in force. But he believes it is no coincidence that so many investigations have been initiated since May 2012, particularly as HMRC knows exactly who to target based on the Treasury’s review last year.
“When in May 2012 HMRC introduced its new IR35 compliance teams and administration of IR35, alongside the business entity tests, it announced that the focus would be on high risk cases,” continues Vessey.
You may be at greater risk of an IR35 review by HMRC if you are working for a public sector client
Andy Vessey, Qdos
“At that time, HMRC did not provide any indication of what it saw as high risk. The picture is now clearer and you may be at greater risk of an IR35 review by HMRC if you are working for a public sector client.”
IR35 Forum members challenged HMRC’s public sector focus
This increased number of public sector IR35 reviews is not just Vessey’s experience. During its January 2013 meeting, non-HMRC members of the IR35 Forum specifically asked HMRC if it was stepping up compliance activity in the public sector.
HMRC denied any special attention on public sector contractors, responding:
“HMRC emphasised that it had always undertaken compliance activity in the public sector and would not want the impression to be gained that the Review of Public Sector Appointments had in some way resulted in HMRC for the first time considering compliance risk where there was a public sector aspect.”
“The only factor connecting many of our recent contractor clients is that they work in the public sector and that they are well paid,” highlights Vessey. “High pay means potentially high yield for HMRC if an IR35 review is successful.”
HMRC may be reverting to its old ways of managing IR53 reviews
What has particularly concerned Vessey about his recent interactions with HMRC over public sector contractor IR35 reviews is that some investigating officers are disregarding compelling evidence that should halt reviews right at the start.
“With one contractor’s case, I presented evidence that he was clearly in business and suffering financial risk, but HMRC has insisted on contacting the contractor’s client,” says Vessey. “This approach harks back to the old style enquiries when HMRC used to contact clients in each and every IR35 case.
“Of course HMRC has the powers to test evidence with end clients, but this flies in the face of the commitment it gave on May 2012, when HMRC said that if adequate evidence is presented, it would shut down cases during early stages.”
And according to Vessey, the business entity tests have so far proved to be of little use for genuine contractors: “Our standard operating procedure is to apply the business entity tests to all new contractor clients. But, although they are genuine contractors, all fall into the medium and high risk bands.”
He adds that, no matter what risk band they are shown to be in, “We are confident we will successfully defend each contractor’s case, based on our preliminary assessments of our new public sector clients.”
No tax insurance increases the risk of being found inside IR35
Vessey is also concerned that some public sector contractors who do not have tax investigation insurance may simply give in to HMRC because of the costs of mounting an IR35 defence.
“Contractors with no tax investigation insurance face time charges at consultancy rates. For most high quality IR35 consultancies, contractors will pay upwards of £120 an hour plus VAT,” he explains.
“For a new client, once the IR35 consultancy has familiarised itself with the contractor’s business, reviewed the contracts and assembled the evidence, an initial response to HMRC will cost £600-£700 plus VAT, which will be paid by the contractor’s limited company. Furthermore, these costs are not tax deductible.”
A full-scale enquiry, which would typically take 20 hours of a consultant’s time if there are no complications, can cost a contractor several thousand pounds. This can all be covered by insurance.
“In my experience, in any tax enquiry where the contractor has no insurance, the cost plays a major role in the contractor’s behaviour and resulting defence strategy,” notes Vessey. “Yet contractors are suffering all this stress for the sake of around £10 a month, which is all an entry level tax investigation insurance policy will cost.”
Vessey concludes: “Contractors working in the public sector are now at greater risk of IR35 compliance action from HMRC. If they have no tax investigation insurance, now is the time to act because there is every chance that they might be the next contractor in HMRC’s crosshairs.”