IR35 Where are we now?
IR35 remains a very hot topic. Following the OTS (Office of Tax Simplification) review of IR35 and the Government’s commitment to keep IR35 and improve the way it is administered by HMRC we have seen lots of changes including:
- Creation of the IR35 Forum
- Complete review and rewrite of HMRC’s IR35 guidance
- New IR35 HMRC compliance approach with 5 specialist HMRC IR35 teams
- Lots more IR35 investigations
- Trial of the Business Entity Tests
- Improved promotion and communication of IR35
- Launch of HMRC’s IR35 contract review service and helpline
- New Assurance processes for IR35 for those in the Public Sector
- Office Holder tax rules changed
We have also seen the review of the use of Personal Service Companies by the House of Lords Select Committee earlier this year.
Pilot and the report
All these new IR35 processes have recently been subject to review and the IR35 Forum has now published their report on the new processes. This report also aims to address many issues raised by the House of Lords Select Committee.
Key findings in a nutshell
Much has already been done to improve the administration of IR35 and there is more to do on many of the areas identified for improvement.
The Business Entity Tests will be abolished with effect from April 2015. The tests were designed to indicate the level of risk of an IR35 investigation, rather than being any sort of status test. However, it became clear that the tests were of little use to the typical contractor or Personal Service Company user with most of them falling into the “high risk” band. Worse still it was found that the tests were being manipulated and various web sites sprung up offering to rent virtual offices to contractors and all sorts of additions (at a fee) to gain a “low risk” score. Because the tests are all about the risk of IR35 HMRC investigation, achieving a low risk score does NOT mean that IR35 does not apply. So it’s goodbye to the BETS and not before time.
IR35 Investigations.......beware of the following:
- If you or your client receives a Business Records Check letter from HMRC that asks whether IR35 has been considered please note that you have on your hands a full blown IR35 investigation.
If you ask HMRC for an extension of time to gather all the information they will grant this and confirm the extension within a formal “Notice to Produce”. This is a very unsettling experience for your clients.
- These enquiries are not being confined to IR35 and you will likely have an expenses and benefits enquiry at the same time.
- Without exception HMRC are interviewing the end client for their views on the day-to-day working practices.
- If your client contracts to the end client via an agency you cannot rely at all on the clauses in the agency contract in isolation to support an outside IR35 decision.
- You must always take an in-depth look at what the client is actually doing. Any sort of IR35 opinion based on the terms and conditions set out in the written contract alone is meaningless. This applies even where you have a direct contract i.e. no agency.
- Consider getting some sort of confirmation of the true terms and conditions from the end client, as part of your normal review process and certainly ahead of any technical submission to HMRC.
- 50% of all IR35 current enquiries are into those providing services to the Public Sector. You need to take even greater care when considering IR35 status where there is public money in the contractual chain. We have seen numerous investigations in the traditional government departments e.g. DWP, MOD etc but it is clear that this is now being extended into the NHS, BBC and local authorities.
- Finally don’t panic and seek specialist help.
IR35 Contract Review Tips
- Always look in detail at the actual working practices.
- Make sure you are certain who the end client is – this is often unclear when multiple agencies are involved in the contractual chain.
- Make sure the working practices match the written contract.
- In agency cases try to seek sight of the “upper” contract between the agency and the end client.
- Consider a confirmation of arrangements to bolster your client’s position in the event of a future IR35 investigation.
- IR35 is not a once made in or out decision. It has to be considered for every single contract or extension entered into.
- Beware public sector cases and cases where an outside IR35 position is usually a non-starter e.g. Teachers, Doctors, Nurses, Social Workers etc.
Against this backdrop it is more important than ever that Limited Company clients have their contracts and working practices reviewed in order to ensure they are not caught by IR35.
Published June 2015