An evaluation of the HMRC IR35 advice and guidance

Introduction

Being inside IR35 means that for tax purposes you will be judged as being a ‘disguised employee’ and thus pay significantly more tax.

You can find out the financial impacts of IR35 on you using the IR35 Calculator.

HMRC publish IR35 advice and guidance on their web site. This article discusses the value of it from an independent viewpoint.

HMRC available advice and guidance

The list below links to the advice and guidance on the HMRC web site:

• IR35 – Countering Avoidance in the Provision of Personal Services
• IR35 FAQ’s
• Working out if you are employed or self-employed
• Employment Status Manual
• Provision of Personal Services Through Intermediaries

[Note that the Revenue has internal training and documents related to IR35 that are not published on the site.]

Case law

The leaflet IR56 states “The law for tax and social security legislation does not define ‘employment’ and ‘self-employment’. But, over the years, the Courts have considered this issue and their guidance on whether an individual is an employee or self-employed is known as case law.”

Thus there have been disputes in Court between individuals and HMRC where the individual has been claiming they are ‘self-employed’ and the Revenue has been arguing that the individual is an employee. If the IR win they can then claim more tax revenues.

It is the outcomes of these disputes and the precedents set in those cases that are applicable to IR35.

The grey area

Non HMRC experts estimate that 20% of contractors are definitely outside IR35, 20% are definitely inside IR35, leaving the remaining 60% in the grey area in the middle.

Whilst HMRC advice is not intended to be biased the onus tends to be on convincing the contractor that they are a disguised employee unless they are in the ‘definitely outside’ zone.

With many contractors being potential borderline cases, there is also no direct advice explaining how contractors can remain outside IR35.

The guideline questions

In IR56 (pages 5 and 6) and IR175 (page 1) there are a series of questions intended to help a contractor evaluate their status as either ‘employed’ or ‘self-employed’.

These statements can be misleading for the contractor who does not have expert knowledge and experience of the case law history.

Each case is different and there are many contractors who have successfully passed IR35 who answered ‘Yes’ to many of the factors the Revenue suggests are pointers to employment.

With respect to the Revenue, they do state on page 2 or IR56 that the questions ‘…are only a brief guide and don’t cover every situation.’ They admit the advice cannot cover all situations.

We would strengthen that statement and suggest that they are ignored completely and expert advice sought elsewhere.

Seeking advice from HMRC

HMRC also advises in their documents that if a contractor needs further help that they should contact HMRC who will judge their individual case for them.

For a contractor, this is a very bad idea, because HMRC will seek to prove that the contractor is an employee in most cases. Having raised and waved a ‘come and get me’ flag the contractor might then find themselves the subject of a self assessment investigation.

A far better alternative is to seek independent opinion from an expert in IR35, preferably before you sign a contract. They will be able to review your contracts, help you remain outside IR35 and protect you against any challenge from the Revenue.

Conclusion

HMRC advice is misleading and we strongly advise contractors to seek expert advice from someone outside HMRC.

We do not recommend that contractors contact HMRC directly to have their particular situation assessed.