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HMRC Loses £100k IR35 Enquiry

HMRC loses £100k IR35 enquiry in another story of taxman’s shambolic approach to compliance

With many of us looking ahead to what HMRC has in store for the roll-out of private sector IR35 reform next year, you could be forgiven for not noticing the current behaviour of the taxman. But it was again brought into sharp focus this month at Qdos in a disturbing case of a needless IR35 enquiry, delay, lack of transparency and indifference to the impact of the contractors involved.

Last week, Qdos received the welcome news that we had successfully shut down a year-long IR35 enquiry where the tax liabilities would have amounted to more than £100,000 for two contractors, both of whom are directors for the limited company that was under investigation.

The outcome was a huge relief for the contractors of course, whose company was protected with tax enquiry insurance. And it was another win for Qdos. But there is a bigger story behind this that’s worth exploring. The inadequacies the case brought to light and latest defeat inflicted on HMRC should be of concern to all of us.

We are left asking a number of questions about the case. Why, when the right of substitution was exercised regularly by the contractors on the two projects being investigated, did it take HMRC more than a year to accept that they both belonged outside the scope of IR35? The length of time it took the taxman to accept reality is another indication of HMRC’s lack of care for contractors’ well-being. There appears to be a tendency to draw things out for the long-term.

Of course, demonstrating substitution alone doesn’t always mean a contract should sit outside IR35, but when assessed by CEST – the taxman’s very own IR35 tool – it does. Put any engagement with a genuine right of substitution through CEST and it will deliver an outside IR35 verdict. So why did HMRC, that has shown so much faith in its IR35 technology, choose not to use it to assess the status of these two individuals? Was this deliberate or just another sign of the internal chaos and disorganisation at HMRC? I’ll let you decide, but whatever your opinion, it doesn’t look good for the taxman.

Furthermore, in our team’s expert opinion, control was not exercised by either end-clients. By all criteria, it was a fairly cut and dried case, but HMRC seemed determined to go the distance in what wasn’t your typical IR35 enquiry.

This case was slightly unusual, and not just for the fact that it involved two contractors working through one limited company. HMRC initially opened a Corporation Tax enquiry in 2017 before deciding to pursue the business in January 2018 for IR35 liabilities. Was this merely a coincidence? We can’t rule it out, but the chances of this do seem slim. And so we’re led to wonder whether this was a move to target the company one way or another based on information sharing between departments. As always, HMRC will keep its cards close to its chest, but for all we know this could be a sign of things to come.

In addition to HMRC finally accepting that IR35 did not apply (I hasten to add they didn’t specifically disclose why), there was one other positive to take from this particular case. The two private sector end-clients were very supportive of the contractors’ outside IR35 status, emphasising just how important it is that contractors, clients and when involved, agencies, are joined up in their thinking.

This part of the story at least bodes well for contractors, many of whom quite understandably have fears about the private sector’s readiness for next April, when medium and large engagers become responsible for administering IR35. It shows that some private sector companies are ready to contribute to the discussion, take the matter seriously and will support contractors’ outside IR35 status. We’re working hard to make sure this message carries through when the liability shifts to these engagers next year – IR35 reform can be managed but accurate assessments must be prioritised over risk-averse decisions.

HMRC also has a responsibility to play its part in all of this too. After suffering yet another loss, the taxman needs to rethink the way it enforces IR35 – because right now, its current strategy clearly isn’t working.

By Qdos Contractor

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5 thoughts on “HMRC Loses £100k IR35 Enquiry”

  1. Ying Tong

    This is another example demonstrating HMRC’s indifference to the law. They are pushing at an open door with the Treasury desperate to raise revenue from any source to finance Brexit costs reportedly running at £40b annually and counting. It’s possible Brexit might ultimately yield a dividend but I’ve yet to see any evidence or credible projections for it. Whereas on the debit side we are already seeing Honda, Nissan, Airbus, HSBC, Barclays and many others heading for the exits. How ironic to say the least that the good folks of Sunderland, Swindon and Wales all voted for Christmas.

    HMRC’s minions whisper in the permanent secretary’s ear that £800m here, £1b there can be delivered providing Her Maj’s 1st division boys are not too picky about the methods. And what would you need to achieve this? Well we’d need a few more good people, say 5,000, some more budget naturally. Well you shall have it, and a nice gong to match. And everyone in Whitehall is happy.

    • MIKE

      What utter ramblings? the EU and the so called socialist elite have caused the current situation, we have the dictatorship EU that have been working behind closed doors pushing for more money every year for absolutely nothing in return… oh sorry that’s it sponsorship via a miniscule amount of our own money back, not to mention the deliberate flooding of our country with immigrants draining our economy, supressing wages and fracturing communities. and the subsidising of imports by “free trade” which is basically shifting the tariffs from the importer/exporter on to the general public purse, so the tax payer pays the tariff regardless of whether they wanted to buy the said product or not. cushy for the manufactures outside of the UK importing in.. it basically decimated our manufacturing and production base, and not only did they do with via monetary means they forced the so called quotas on to our farming and fishing protecting the imports from other EU countries… the list goes on. All the while, we have a ever increasing base population that can not even cover their own costs so are supported by the state! Of course HMRC are looking for money and their usual target are the middle class worker. your insight in to what is really going on/has gone on in the past is typical of the narrow minded remain who shout the same rhetoric.

      • Ying Tong

        Let’s accept your every claim for the moment. The EU is a dictatorship, it only takes from us, it flooded our country with immigrants, drained the economy, suppressed wages, fractured communities, decimated manufacturing, imposed quotas on farming and fishing. We have a base population that can’t cover its costs and so is supported by the state. Let’s say it’s all down to the EU.

        Still, we are where we are, yes? Not where we were forty years ago.

        1. How does Brexit roll all that back?
        2. How do we convert the state supported base population into enterprising wealth generators?
        3. Who will do the work performed at the moment by wage suppressing immigrants?
        4. How do we deal with these immigrants? Do we throw them out? Even if they’re British?
        5. How do we replace Honda, Nissan, Airbus, Barclays, HSBC and the others who do not share this appetite for risk?
        6. Over what period of time does this transformation take place? Is it two generations, 100 years, something else?
        7. Whilst we’re attempting to resume our place at the head of the new industrial revolution, how do competing nations and trade blocs react? Do they defer to our Britishness and accept that their economies should decline so that ours might improve? Or do they complete with us from a position not disadvantaged by all the miseries they have apparently visited upon us?

  2. CX

    Why do you believe that HMRC’s methods ‘clearly aren’t working’?

    If their strategy is to make people fear an IR35 investigation then randomly picking on targets and giving them hell for ages for no good reason is probably achieving what they want.

    Presumably they hope that many will simply choose to operate inside IR35 and sleep at night.

    My personal view is that they simply pick a victim every now and again to keep this at the forefront of people’s minds.

  3. Andrew Harrison

    The really sad thing about these cases is the elapsed time.
    My experience when I got my paperwork wrong was that HMRC were reasonable but it took them 6 months to get there. Perhaps if the individuals who make up HMRC weren’t trying to implement a steadily growing heap of legislation with a decreasing number of colleagues the painful delay between investigation and the all clear could be reduced. I would like to blame the politicians but Hanlon’s Razor applies.

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