This is the first part in our serialisation of an IR35 enquiry. To Access the following parts please visit our IR35 Chronicles Index.
Whilst the names, characters and actual events in our tale are fictional, the events themselves are typical of an IR35 enquiry.
Those who have had the misfortune to undergo this experience will identify with some or all of our mythical contractors' experiences. For those who have, thus far, kept off HMRC's radar, this story will provide you with an insight into the machinations of the HMRC psyche and how its officers behave during an IR35 enquiry.
Neil Down is the sole director and majority shareholder of his own IT consultancy company, BSOD Ltd. The other shareholder is his wife, Delia, who is also the company secretary. The company was formed 12 years ago, following his redundancy from MBI plc, a large IT technology and consultancy company. At the time of his redundancy Neil could not find a suitable job that paid him the level of salary that he was accustomed to and also required to support his lifestyle and his family. He also believed that his extensive experience within the industry, coupled with his degree in computer engineering should be properly rewarded. After submitting his CV to numerous agencies, he was offered a temporary assignment with Cryptic Corporation. The assignment was conditional, however, on Neil forming and operating through his own limited company as Cryptic did not want to recruit permanent staff for the project he was to be involved with. As the offer was a financially lucrative one, Neil accepted it.
Having been employed for all his working life, Neil had a limited knowledge of the UK tax system and in running a business, so he contacted a small and local accountancy firm, Cheatem & Howe who explained to him the implications of incorporation and IR35, and helped him set up his own company. Apart from ad hoc advice Neil has used the services of his accountant mainly for company accounts preparation and the submission of both corporate and personal self assessment tax returns.
After a relatively successful first year contracting, Neil earned himself a further contract with Cryptic, albeit on a different project, which lasted 18 months. There then followed a series of different engagements with various end clients lasting from 2 months (shortest) to 2 years (longest). In 2005 BSOD was involved in a one year specialist project for the Royal Bank of UK, which was then succeeded by a contract to provide services to BIG IT. The latter contract was for an initial 6 month period but as the contract reached its termination date a further contract was entered into for another 6 month period and this remained the pattern until 2009 when the final 6 month contract reached its natural conclusion.
Over the years Neil has become IR35 savvy, picking up knowledge through affinity groups, firms specialising in IR35, websites (including HMRC), publications and sharing information with colleagues.
Neil has never shirked the personal service question when completing the employers annual return (form P35) and his own self assessment tax return. He has always been diligent in having his company's contracts reviewed by a firm of IR35 specialists and had felt secure in the knowledge that these have always been regarded as falling outside of IR35. There has been the odd occasion when contractual clauses have had to be renegotiated to preserve their IR35 status but nevertheless they all ultimately feel to be considered outside of the intermediaries legislation.
BSOD Ltd has been a profitable company, even more so since 2005 when it secured the two lucrative contracts with Royal Bank of UK and BIG IT plc. Profits have been extracted by way of a modest salary and dividends. In an attempt to divert the attentions of HMRC, Neil has always paid himself a constant annual salary of £10,000. The remaining and largest proportion of the profits have however been distributed to Neil and his wife by way of dividends, although some profits have been retained in the company to purchase capital items such as IT and office equipment.
Life in the garden was going swimmingly well until 2 ½ years ago when the dreaded Revenue letter fell on Neil's doorstep informing him that HMRC wanted to carry out an inspection of BSOD's PAYE records. Neil immediately contacted his accountant who had already received a copy of the same letter.
Mr Fiddler, his advisor at Cheatem & Howe, alerted him to the fact that this was no ordinary PAYE review and that IR35 was the key motivation as the letter had requested that copies of all contracts from 2006 be submitted to HMRC ahead of an agreed inspection date. Furthermore, the letter also stated that the Revenue wished to discuss the contracts and, in particular, the working practices with Neil on the same day as the inspection.
Despite Neil's initial reservations about the meeting and being subjected to Revenue questioning, Mr Fiddler put his mind at rest and suggested that the meeting should go ahead with both of them present as the accountant believed that face-to-face meetings help expedite enquiries. So it was agreed that a response be sent to HMRC enclosing copies of the requested contracts together with a suggested time and date for the inspection to be carried out at Neil's home.
Next week: The PAYE inspection.