A Better IR35 Life?

IR35 Forum Review Published

The anticipation has now been brought to an end with the recent publication of the IR35 Forum Administration Review but was it worth the wait?

 The report details five specific areas of IR35 administration:

1. External guidance
2. Promotion and communication of IR35
3. Business Entity Tests (BET’s)
4. IR35 Helpline and Contract Review Service
5. New compliance approach

with a total of 32 recommendations intended to improve the practical operation of IR35.

External Guidance

Four of the five recommendations in this category shared a common theme; that HMRC continue to update the IR35 guidance pages on GOV.uk and update or create links to it from other pages. This approach is supported by HMRC.

Promotion and Communication of IR35

A number of recommendations centred around seminars being hosted by representative bodies and trade organisations at which HMRC and/or other IR35 experts would be invited to speak with a view to raising awareness of IR35 amongst the freelancing community. HMRC should also host free of charge seminars which would help enlighten the public sector.

Only those recommendations that provide the best return for cost will be implemented.

BETs

Despite agreeing to dispense with BETs as from April of this year, HMRC believe the tests are fit for purpose in so far as they are a fair reflection of its own view of IR35. However, there was broad agreement amongst the Forum membership that the scoring system generally resulted in the majority of contractors falling into the high or medium risk categories, something the Revenue had not originally envisaged!

There was concern that BETs were encouraging abnormal behaviours in some freelancers as they attempted to satisfy certain tests to place themselves in the low risk category. For example, some contractors have considered maintaining a form of business premises for no other reason than to score the 10 points that are attached to the “premises” test.

Unsurprisingly, public sector departments are incorrectly using BETs as an absolute test for gauging whether or not IR35 applies to a particular contract. Even Capita, the agency, are using IR35 declarations and assurances based on BETs to assure compliance with tax obligations, with those unable to secure a low risk score in danger of being forced to operate inside of IR35 or risk losing a contract.

Having concluded and decided to scrap BETs there still remains no immediate replacement despite the existing need for business assurance.

IR35 Helpline and Contract Review Service

In the last tax year, 2013/14, the helpline received 942 calls which was down on the previous tax by around 20%. Those enquiries fell into the following categories:

Statistics for the Contract Review Service are pitiful and reflect contractors’ mistrust and lack of faith in the service. In 2013/14 HMRC received 64 contact review requests of which the department only gave an opinion on 16 – 14 outside of IR35 and 2 caught.

The Contract Review Service is surely in danger of becoming extinct unless HMRC adopts the recommendation that the department gives a qualified opinion, which is not guaranteed, even if:

• they have not received the upper level agreement;
• the contract has not been signed;
• the contract is not documented but the verbal terms are relayed to HMRC.

This would at least assist a freelancer to gauge their IR35 risk.

New Compliance Approach

There is a call by accountants and advisors for HMRC to ensure that enquiries remain consistent in approach. When the new approach to IR35 came into being in 2012 enquiries were being concluded quickly. However, over time HMRC has reverted to type and is taking longer to settle investigations and not accepting evidence at face value but choosing instead to dig deeper.

Two consultants reported that their client had received over 100 questions, many of which had no bearing on IR35 status. This was followed by an additional 25 questions and requests for copies of e-mail exchanges covering the same issues.

More often than not HMRC will always request a meeting with the contractor during an IR35 enquiry but in most cases they don’t transpire. This is because freelancers are, quite rightly, reluctant to surrender fees simply to talk to HMRC especially when there is no promise of a resolution to the enquiry by agreeing to a meeting.

Suggestions to improve meetings include:

• Have e-mail and telephone contact rather than a meeting as this is more cost effective.
• HMRC provide an agenda before the meeting to enable a contractor to evaluate whether it would be beneficial to proceed.

Rather surprisingly it was felt that HMRC having access to the end client was beneficial, unless this jeopardised the freelancer’s contract. As IR35 enquiries hinge on the day-to-day working practices end user confirmation of the facts can bring about a swifter resolution but they can also give the Revenue free licence to ask whatever questions they wish and also pose suggestions that further their own cause.

A number of suggestions to improve the process of HMRC accessing the end client include:

• HMRC clarifying the results of their initial review of information and why they cannot reach a decision, as it is felt that it is too easy for HMRC to request more information without explanation.
• HMRC clarifying the circumstances they would use their information powers with regard to end user information.
• Informing the contractor that the end user will be approached as a matter of courtesy.

Overall perhaps not a great deal to get too excited about but if the recommendations to restore the enquiry process to what it was over two years ago are followed through, then this may provide some crumb of comfort.

The full document can be downloaded below:

IR35 Forum – ADMINISTRATION REVIEW