Contractor Weekly has seen what appears to be one of the new style IR35 compliance letters that had been expected to be issued last month. Whilst the letter has not emanated from one of the new specialist teams its contents contain all the hallmarks and fingerprints of their handiwork.
Right on cue, the letter was issued on the last day of May and was justified as a check of employer records but was selective in that it only requested information surrounding IR35, i.e. copies of all contracts and a breakdown of the company's income within a one year accounting period.
The letter then goes on to say, “Will you please also tell me whether you have considered the possibility of the company being subject to what is commonly referred to as the IR35 legislation? If you have, and have concluded that the company is not subject to that legislation then please explain to me the basis upon which you arrived at that conclusion. I am asking this to help me be fully aware of and understand any view you may hold on the application of the IR35 legislation.”
We were told that at the start of each IR35 review, HMRC would ask, 'Have you considered IR35? If so why do you consider to be outside of IR35? Please provide evidence to support this answer.' Whilst the wording in the afore-mentioned letter is not identical it does appear to be too similar to be mere coincidence.
Any contractor receiving one of these letters at this time will know that they have been classified as high risk as it is only this category that have been initially selected for the first wave of IR35 enquiries under the revised approach. Freelancers in receipt of this correspondence should immediately contact an IR35 specialist to seek advice and organise a co-ordinated response.
Where good quality evidence can be provided to HMRC to substantiate a contractor's view that their company's contracts are outside of IR35, then the Revenue have given an assurance that they will withdraw from the review. Such evidence will include:
- Copies of contract reviews that have been undertaken by IR35 experts;
- Copies of invoices that show fluctuating fees billed thus helping to demonstrate that the freelancer had a degree of control over the time they spent carrying out the services;
- Copies of any business tenders;
- Copies of business insurance schedules;
- Documentation in the form of letters or e-mails that demonstrate an absence of control being exerted over the contractor, lack of personal service etc.;
- Details of any substantial investment in business assets, training, advertising and marketing;
- Details of any occasions a contract was terminated early by either party or when contractors were asked to stay away from an end client site for whatever reason whilst permanent staff remained in place.
This is not an exhaustive list and there will be other forms of evidence that support a contractor's case. Whatever that evidence is it should be presented to HMRC at the very outset so as to bring a swift a conclusion to the review as is possible.
There is no requirement to answer the questions that are asked. In order to demonstrate being Outside IR35 it is only necessary to address the issues of law.
Therefore the sensible response would be along the lines of:
I have considered the status of my company in accordance with the law and since the questions that you asked relate to matters that are not matters of law as it stands, I will profer instead the steps I have taken that are related to the law:
[Suppose you are insured by Qdos TLC35 or equivalent}
1. My contracts have been reviewed and the findings have been that the major factors of right of substitution, mutuality of obligation and direction & control are consistent with self-employment.
2. This is the opinion of professional insurers who are prepared to defend this, since they will be liable for the tax, NI and penalties arising if they were found to be wrong.
I should add that if you have such insurance then they would expect you to get in touch with them immediately on receipt of any such communication from HMRC – and I would expect that the insurer would write to HMRC in the vein given above.
Interesting, that last bullet point. How would it stand, say, if you and others are working on identical contracts, and one or more of those others had their contracts terminated early?
Assuming you can show that their contracts are identical (or near enough in all material or relevant aspects) to yours, presumably this will provide the necessary evidence?
David,
The circumstances you describe would help to demonstrate a risk but if your company’s contract was not terminated then it does not carry as much weight.
#1 – This is not correct. You must be able to support your opinion with factual evidence. This is what a Tribunal would expect & simply refusing to answer HMRC questions will merely lengthen the enquiry process. Furthermore, HMRC can compel a taxpayer to provide information using their statutory powers if necessary