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Will HMRC stop investigating contractors when IR35 reform lands?

Will HMRC solely focus on firms’ compliance from April 2021?

Q. I’m aware that changes to the off-payroll working rules will now certainly be rolled out to the private sector next April, with the risk that we currently carry as contractors to be handed to our client or recruitment agency. Does this mean that HMRC will stop investigating contractors from April 2021, with the focus on businesses rather than us, the contractors?

A. You are right to an extent, in that from 6th April 2021 contractors will no longer be liable for IR35 when engaged by medium and large businesses, much like in the public sector. For existing contracts that roll over past this date and ones that begin upon or after 6th April, HMRC will hold the fee-paying party (either your client or your agency) responsible for any incorrect determinations, instead of you, the contractor. 

However, given ‘small’ private sector firms are exempt from the incoming changes, you will continue to determine your IR35 status when engaged by these clients and also carry the IR35 risk. In this scenario, contractors will remain the focus of an IR35 investigation and liable for any outstanding tax liabilities that HMRC deems payable. 

Whilst the above is fairly common knowledge, less spoken about is the fact that HMRC can – and in many cases will – scrutinise contracts that ended up to six years ago, perhaps ones even older than that if the tax office suspects deliberate foul play. This means that even when IR35 reform is enforced next year, HMRC has the right to investigate completed engagements that took place when contractors held the liability (up to 6th April 2021). 

Given HMRC is under increasing pressure to raise tax revenue as a result of COVID-19, and believes as many as 9 in 10 contractors who ought to be working inside IR35 are operating outside the legislation, independent workers should be wary of aggressive IR35 compliance activity. 

That’s not to say the number of IR35 enquiries opened against contractors will necessarily increase when IR35 reform lands next year – more that HMRC will continue to allow itself the right to examine prior engagements and is unlikely to stop targeting contractors any time soon. 

As a result, contractors may want to continue to protect themselves from the threat IR35 will continue to pose for a number of years. An IR35 insurance policy will cover the costs of defence in court, tax liabilities owed, along with interest and penalties should it be decided you were wrongly working outside the scope of the legislation.

This answer was provided by IR35 specialist, Qdos Contractor. Ask your contracting-related questions to the Contractor Doctor here.

By Contractor Doctor

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