Contractors facing an IR35 review by HMRC can still get their investigation shut down quickly if they can secure early intervention from an IR35 expert.
Qdos Consulting’s IR35 expert Andy Vessey has recently helped a contractor do just that, as he explains: “Despite a worrying reversion of HMRC’s attitude back to the ‘old days’ when some status inspectors would refuse to listen to the evidence, we’ve recently been able to help a contractor shut down an IR35 review within 30 days.
“This is in line with the commitment made by HMRC when it introduced its new IR35 administration framework, which includes the business entity tests, back in May 2012.”
Why was the contractor targeted?
Vessey believes that the contractor was deliberately targeted by HMRC because she has worked on two public sector contracts during the tax year under investigation: “I have no doubt that this contractor’s name was on the list passed to HMRC during the public sector review of off-payroll workers in 2013.
“Fortunately, the contractor had four contracts during the year of enquiry. Two were with government agencies, one with a housing association and another with a private sector client. HMRC knew all about the two public sector contracts, but not the others. This speaks volumes.”
I have no doubt that this contractor's name was on the list passed to HMRC during the public sector review of off-payroll workers in 2013
Andy Vessey, Qdos Consulting
Vessey has seen a large number of cases over the last twelve months that he suspects have almost certainly arisen directly as a result of contractors’ details being passed to HMRC by their public sector clients.
Building a case for defence
“Fortunately, the contractor had invested in tax investigation insurance so I was able to act immediately,” continues Vessey. “She had some excellent evidence and we spent a good number of hours discussing each contract in detail.
“What was particularly useful was that she had been working on concurrent contracts. So, when she was working for one of the government agency clients, she was also doing work for other clients, which the contract specifically allowed her to do. The contractor’s government agency client was also willing to testify to this effect, although we did not need their evidence in the end.”
Vessey also asked the contractor to complete the business entity tests, which is standard operating procedure for all contractors under investigation: “The contractor did not rack up the necessary 20 points for her to be in the low risk zone, but the other supporting evidence was enough to place the contracts outside of IR35, demonstrating the limitations of the business entity tests.”
Submitting a nine-page letter to HMRC
Based on the evidence supplied by the contractor, Vessey wrote a nine-page letter to the HMRC status inspector covering all four contracts during the year under investigation.
It included a review of all of the employment status principles for each of the contracts. A strong theme running through the letter was the fact that these were not exclusive contracts and the contractor was doing other work throughout that time.
“The ‘in business on their own account’ test was well and truly passed and the concurrent contracts were the decisive factor that showed all of the contracts were outside IR35,” says Vessey. “We did not include any third party evidence at this time because it was not necessary to provide it.”
HMRC kept to its promises made in May 2012
According to Vessey, following submission of the letter, the HMRC status inspector did not take a lot of time to come to a conclusion: “The IR35 review was closed by HMRC within 30 days of us submitting the letter. I was slightly surprised, as there are normally more questions for clarification in response to an initial letter, but clearly the evidence was compelling.
“In this case, HMRC was keeping to its promise in May 2012 that it would close down reviews quickly if there is satisfactory evidence that IR35 does not apply. That was clearly the case for all four of this contractor’s contracts.”
In Vessey’s opinion, it was the non-exclusive contracts that were the feature of this case: “It goes to show that it is not always the major status factors that can help swing a case.
“Here we had an example of not only having a contractual right to work concurrently, but the contractor had also actually exercised the right, which elevated its significance. Plus the contractor was clearly running a business.”
HMRC is starting to target contractors in the financial sector
Although HMRC still appears to be working its way through the lists of contractors with public sector contracts that had been handed over during the public sector off-payroll review in 2013, Vessey is seeing a new trend emerge.
He explains: “We’ve started to see high earning financial IT contractors under investigation. HMRC may be targeting this group because financial sector clients tend to exert a higher degree of control over their contractors than other sectors. And because they are typically high earning, financial contractors are likely to give a good tax yield if found to be inside IR35.”
There is little financial IT contractors can do to avoid being targeted, as HMRC has a wide range of profiling options that include working through client accounts to identify subcontracting companies and directly identifying the contractor limited companies through the single owner/director, high dividends and low salaries.
However, Vessey urges all contractors to implement IR35 best practice: “Contractors should consider taking out tax investigation insurance and preparing dossiers of evidence for all of their contracts in case of an IR35 investigation.”