Prior to late last month it had been six months since the IR35 Forum assembled but then sufficient time was needed to elapse to allow for a critical assessment of the revised approach to IR35.
The minutes of the latest meeting held on 22nd January reveal that an opportunity was missed by Forum members to quiz HMRC as to whether or not they intend to issue definitive guidance as to who and what an 'office holder' is for IR35 purposes before the legislation kicks in on 6th April 2013. A two week window was, however, afforded to members who wished to make representations on the proposed legislation which HMRC promised to consider and, if appropriate, take remedial action before publication of the Finance Bill.
Instead, members called for the legislation to be made clear that it will not apply to an office holder of the owner's own company. It was confirmed by HMRC that it was not the intention for the legislation to apply in these circumstances.
Will the proposed legislation apply to company secretaries the Forum asked? In such cases, HMRC said that they will look at the terms and conditions where a personal service company is acting as company secretary on behalf of its client. The question, however, is a poignant one as since 6th April 2008 private companies have had the option to appoint a company secretary or not. It is therefore not a requirement of company law. Yet, HMRC's Employment Status Manual 2503 still states, “a director of a company is an office holder because the Companies Act requires a company to have a board of directors and similarly all companies are required to have a company secretary…” Time for an update!
It was confirmed that HMRC's newly created trio of specialist teams had made good progress and were on target to hit the 230 enquiries they had publicly committed to by March of this year.
Some criticism was levelled at HMRC over poor communication conveyed in letters and delays caused by the department in responding to correspondence. The Revenue accepted that post handling was an issue but was not something specific to IR35 and the situation was improving as testified by the department's chief executive, Lin Homer, when she recently addressed the Public Accounts Committee.
Not all delays were down to postal times but also due to sheer volume of data received by the Revenue's teams at any one time,
Delays in communication could be improved, of course, if HMRC were to universally embrace the use of e-mail and although the department will consider the extent of which e-mail could be used more extensively in IR35 enquiries this has to be measured against the Revenue's general communication policy. HMRC is sensitive about e-mail as it considers it to be a less secure method of communication.
Where HMRC require a substantial amount of information and also where complexity exists it was felt that the Revenue should allow contractors at least 6 weeks to respond to the opening letter rather than the traditional 30 days. Currently, if a freelancer requires additional time to reply to the initial enquiry letter HMRC are normally happy to oblige but will formally write to the contractor to advise that failure to meet the revised deadline may result in a penalty being levied. Allowing an extension to response times in IR35 enquiries would fly in the face of the department's policy for all enquiries and reviews. Furthermore, it takes approximately 80 days from the opening letter to the issue of the first penalty notice, so HMRC are of the opinion that ample time already exists for contractors to avoid a penalty.
Concern was expressed that, in some cases, HMRC were asking to see copies of upper level contracts between the agency and the end client. It was argued that such requests suggested that the Revenue intended to make a direct approach to the end client for information, causing anxiety as such actions in the past had caused freelancers to lose contracts. Although HMRC will always approach the contractor for such information they will nevertheless reserve the right to approach third parties where the freelancer is unable to co-operate and where it is deemed necessary.
A number of contractors providing their services to the Department of Health had voiced discontent about the treatment they had received from HMRC particularly in correspondence. HMRC however questioned whether there was any confusion with HM Treasury's assurance procedures for all freelancers working in the public sector and any discussion was deferred to allow copies of specific correspondence to be relayed to HMRC for further investigation.
It has become noticeable that, over recent months, a good number of new IR35 enquiries involve those contractors providing their services to governmental departments but HMRC emphasised that it had always carried out compliance reviews in the public sector and did not want the impression to be formed that last year’s review of public sector appointments had resulted in them for the first time considering the IR35 risk in this area.
When HMRC carry out its review and report on the revised approach to IR35 over the summer it will look at the scope to distinguish statistics between enquiries in the public and private sectors.
One Forum member reported a case where a public body had made requests to contractors for a certificate from HMRC to confirm they were outside of IR35. HMRC confirmed that there is no requirement for a public sector department to see any Revenue documentation or to seek a definitive view from them regarding the application of IR35. Furthermore, HMRC is bound by a duty of confidentiality not to divulge taxpayer information and under no circumstances would they discuss the tax affairs of an individual or company engaged by a public body.
The Forum asked for further clarification on the issue of guidance over due diligence and assurance that public sector departments need to carry out when engaging contractors, which HMRC promised to provide.
By the next meeting HMRC agreed to provide details of numbers of those using their contract review service and whether there was scope to provide data on usage of the business entity tests (BETs).
According to some Forum members the BETs were not easily accessible on HMRC's website. Currently all IR35 guidance is under review with the suggestion that some of it may be refreshed but not rewritten. To assist in this process HMRC encouraged the Forum to provide it with feedback on the usability of the guidance and the Employment Status Manual.
HMRC apologised for overlooking the question as to whether contractors should include dividend payments in their RTI returns and will answer this point at the next meeting.
A desire to discuss the role of Employment Agencies/Businesses in the labour market, particularly bringing in flexible skills at short notice, in a future session was expressed and agreed to in principle.
Date of next meeting: 29th April 2013