Will moving from outside IR35 to umbrella spark an IR35 enquiry?
Q. I’ve been told by my client that to continue working for them after IR35 reform is introduced next year I’ll need to work via an umbrella company. While this isn’t something I want to do given I currently operate outside IR35, I’m realistic about the economic climate and therefore I’m considering accepting my client’s request. I’ve been engaged by this particular client for 18 months or so, and before I agree to their demands, I’d like to know if extending my project – but working via an umbrella company – might spark a retrospective IR35 enquiry?
A. In theory, moving from working outside IR35 to operating through an umbrella company should not give HMRC any reason to believe your current engagement belongs inside IR35. And if you carried out the right due diligence upon originally determining your IR35 status when the project started 18 months ago – and better still, had your working practices reviewed too – the chance of this sparking an IR35 enquiry are slim.
HMRC have previously said IR35 reform in the private sector will not be retrospective. In other words, they claim they will not investigate contracts that – upon the arrival of the changes next year – shift from outside IR35 to inside IR35 or, in your case, individuals who are reengaged through an umbrella company.
However, even so, an IR35 enquiry cannot be completely ruled out even though the chance of this happening seems relatively low. The tax office has previously said it will allow itself to scrutinise engagements where it suspects deliberate non-compliance, or as HMRC puts it, “fraud or criminal behaviour”. This, effectively, has left the door ajar for a possible IR35 enquiry further down the line.
As a result, you may want to take out an IR35 insurance policy, should you not already hold one. This covers the costs of IR35 advice, legal representation, along with any resulting tax liabilities and fines if it’s decided that you should, in fact, have been working inside IR35 all along.