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.