Can you trust HMRC when it comes to IR35?
By Andy Vessey
Remember back in May 2012 when HMRC heralded their 'Revised Approach' to IR35 administration and, in particular, the department's fresh attitude and new commitment to reducing the length of time it takes to conduct an IR35 enquiry? Forget that as it has proven to be nothing more than a hollow promise.
In the interest of fairness it is necessary to point out that HMRC did appear to be trying to stick to its pledge for about a year but a leopard can't change its spots and the temptation was too great for the Revenue to revert to its old ways.
Three years ago HMRC told us that if satisfactory evidence can be provided at an early stage of an IR35 enquiry then would promise to close down the review and furthermore to give an assurance to the freelancer that they will not bother them again regarding IR35 for the next 3 years. As HMRC are keen to remind those contemplating using a tax avoidance scheme, do not be fooled by something that sounds too good to be true. For those who expressed scepticism at the time, you have been proven correct and the rest of us have been duped.
In the vast majority of IR35 enquiries I have been involved with over the last few years the contractor hasn't been able to achieve the hallowed 'low risk' score by virtue of the now defunct Business Entity Tests, which is not surprising in itself as this was always likely to be the norm. So it is then necessary to find alternative evidence that will satisfy HMRC sufficiently to allow them to close down the enquiry.
Many contractors will be familiar with a document called the 'Confirmation of Arrangements' or 'Statement of Working Practices', which has been in widespread use for nearly as long as the IR35 legislation itself. The document is designed as joint witness statement by both contractor and their end client as a testimony to the actual day-to-day working arrangements of the freelancer. It contains just over 20 questions and addresses all the key areas of employment status. The questions themselves are straightforward and either require a simple tick box answer or a sentence. Once completed both the contractor and an end client representative sign and date the form and the freelancer presents it to HMRC, together with authentication of the end user official, as credible evidence to support their claim to being outside of IR35. What better evidence than a statement, in writing and signed by the end client supporting the contractor's claims, or so you would think.
HMRC, however, are no longer accepting the 'Confirmation of Arrangements' as credible evidence, preferring instead to wheel out the same old, tired and now all too predictable mantra, “the 'Confirmation of Arrangements' document does not replace the necessary fact finding I [compliance officer] am required to undertake as part of this enquiry.” Translated, this means we (HMRC) want to talk to your end client. It's become a fait accompli and a return to the bad old days of the way IR35 enquiries were handled before the Revenue made their worthless promises in May 2012.
When the Revenue do communicate with the end client they simply start from scratch and go over the same old ground disregarding the evidence that has already been put in front of them and which has been provided by the end client! This is not only a potential embarrassment for the poor contractor (although circumstances are beyond their control), an inconvenience for both freelancer and end user, but also a contravention of the Taxpayer's Charter.
Article 9 of the Taxpayer's Charter states, “We aim to take up as little of your time and money as we can.” Yet HMRC are doing exactly the opposite and being allowed to get away with it. Perhaps the precious IR35 Forum could seek to address this in the very near future because at the moment HMRC are riding roughshod over protocol and double crossing the freelancing community.
Published April 2015