Contractors can choose to have their contract reviewed for IR35 status by HMRC’s IR35 Contract Review Service. However, HMRC will only review a contract once it has been entered into, which means that right from the start contractors are leaving themselves exposed to further action by HMRC should the taxman’s opinion class the contract as inside IR35.
Those who then choose to dispute the findings of HMRC’s IR35 unit can find their battle to prove their innocence drag on for years, costing significant sums in professional fees, back taxes, interest and penalties. Such was the fate of IT contractor Novak Brajkovic of Novasoft, who requested a review in 2002.
It is recommended that contractors should only request a contract review from HMRC under very specific circumstances and only when an independent IR35 and employment law expert has already reviewed their circumstances.
What HMRC will expect
When HMRC’s IR35 unit launched in 2000, contractors seeking an opinion needed only to submit their contract by email as an RTF file and await the response. Anecdotal evidence suggests that in most cases the contract in question was found to be inside IR35.
Now when asked for an opinion, HMRC will request chapter and verse, including the contract and ‘any other relevant information’, which covers all or any of the following:
- Any other paperwork to do with the contract, terms and conditions and details of other contractual terms not included in the original paperwork, including verbal agreements
- The client’s contact details and statements in writing from the client and contractor providing their views of working arrangements, including details of how work is allocated and managed and the nature of contractor’s position in the team
- Exactly how the contractor won the contract, agency details, adverts, tenders by the contractor’s limited company and a description of the nature of the services supplied
- Any other information about the contractor and the contractor limited company, including details of other contracts during the year and information such as equipment costs.
Given that the above list has been condensed from HMRC’s original nine bullet points, many of these requirements would send the average client running for cover. The likelihood is that the client’s responses would come via the HR or procurement team, rather than the real client project manager responsible for managing contractors. And this can cause ambiguities that could in themselves lead to the contract being found to be inside IR35.
HMRC’s process
Most local HMRC offices only have a basic knowledge of IR35. So contractor requests for a contract opinion will normally be sent to HMRC’s specialist IR35 unit. Local IR35 inspectors will only normally become involved if the contractor requests a meeting to discuss evidence.
In the event that a contractor disputes the decision, perhaps because they have obtained a second opinion by an independent expert or because additional evidence has come to light, then HMRC’s processes do allow for a decision to be reversed and for the contract to be officially declared as outside IR35.
If the decision is accepted, the contractor could be issued with a formal Section 8 notice informing them that the earnings from the contract assessed will be fully liable for National Insurance Contributions, as well as the expectation that these earnings will also attract income tax liabilities as if the engagement were employment and not a contract.
When to request a review, and when not to
Ideally all limited company contractors should seek a detailed independent expert IR35 contract review, which can cost as little as £100. Based on these results, contractors may choose to request an IR35 contract review from HMRC.
It is recommended that contractors should only request a contract review from HMRC under very specific circumstances and only when an independent IR35 and employment law expert has already reviewed their circumstances
If the contract passes IR35, then it is advisable not to send the contract to HMRC because:
- HMRC may tell you the contract has failed, and the contractor would either have to accept this or expend significant time and money proving it has not
- The sheer number of contractors in the UK means the chances of being investigated by HMRC are slim, especially if the contract has been judged to be inside IR35 by an independent expert, and is therefore unlikely to be viewed as ‘low-hanging fruit’ for an inspector
- If HMRC does investigate, the contractor can demonstrate duty of care in seeking an independent review, which showed the contract was outside of IR35.
If the result of the independent review is borderline, then it is advisable not to send the contract to HMRC, and to take measures to reduce the risk that the contract would be found inside IR35 if HMRC investigated. Not an ideal situation for a contractor, nor one that gives much peace of mind.
If the IR35 expert concludes that the contract is inside IR35, then it may be worth asking HMRC for a review because, one never knows, they could conclude the contract is outside IR35! If the contract is indeed found to be inside IR35, the contractor could liaise with HMRC to make sure that the deemed payment is correctly calculated and paid.
HMRC has an extensive section on its IR35 contract review service and the process used by inspectors and the IR35 Unit in its Employment Status Manual ESM3000 publication. The relevant section aimed at practitioners, such as accountants and HMRC’s own compliance officers, can be found under ‘Opinions on Contracts.’
Published: Monday, July 19, 2010
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