Are contractors who transfer inside IR35 due to reform still at risk of a tax enquiry?
Q. I am convinced that when my current client carries out IR35 assessments they will blanket everyone inside the legislation irrespective of their true status. While I am not happy about this, I am willing to continue working with this client for the rest of the year. However, should I be worried that I am opening myself up to an inevitable IR35 enquiry? What can I do to protect myself against this?
A. First and foremost, you aren’t alone in this situation. While it’s certainly not representative of the entire private sector, many contractors are worried they will be automatically placed inside IR35 by their client in advance of reform next month.
We would advise that you check with your client though, before presuming this will be their response to incoming changes. If they confirm that all contractors will be blanket-placed inside IR35, it’s important that you make clear to them that this is a non-compliant approach, given it ignores ‘reasonable care’.
Working off the basis that your client will uphold this needlessly risk-averse approach to reform and that you will continue with your inside IR35 contract, it’s vital that you explore ways to protect yourself from IR35.
You may be aware, HMRC have promised – to a degree – that they will not open IR35 investigations into contractors that have transferred inside IR35 because of reform. A recently published guidance document explains:
“We have also committed that we will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.”
On the face of it, this indicates that contractors in your position have nothing to worry about with regards to HMRC action. However, the inclusion of “unless there is reason to suspect fraud or criminal behaviour” means HMRC have effectively given themselves permission to do whatever they please if they “suspect” that a contract should have been classed as inside IR35 from the word go.
With this in mind, IR35 will continue to pose a considerable risk to contractors despite the fact that on 6 April it will be the fee-paying party who carries the liability, assuming all obligations have been met throughout the supply chain.
As I’ve previously explained on Contractor Weekly, given HMRC can investigate contracts that completed up to 6 years ago (sometimes even further back if the tax office wishes) the threat of IR35 will remain for quite some time.
To protect yourself, you can take out an IR35 insurance policy – or keep your existing one should you hold this – which can cover the cost of advice, defence in an IR35 investigation, resulting tax liabilities, interest owed and penalties imposed.