Dear Contractor Doctor,
I have been running my own contractor limited company for some years and am concerned that some of my past contracts might have fallen within IR35.
However, I have not had any professional contract reviews of past assignments, nor have I paid income tax and National Insurance Contributions as if I was a deemed employee within IR35.
If I make my contractor limited company dormant, can I avoid an HMRC investigation?
Contractor Doctor says:
Firstly, contractors should always ensure that they conduct IR35 assessments for every contract, to make sure they can clearly demonstrate that they have fulfilled their duty of care in respect to their tax affairs.
The assessment , conducted by a reputable specialist, can clearly establish whether the contractor is working risk free outside of IR35 or ought to be making financial provision (in the case of the original IR35 legislation, April 2000).
HMRC’s investigation ‘window’
Closing down up or making a contractor limited company dormant does not completely absolve a limited company contractor from their responsibilities for contracts they worked on whilst the company was trading.
When a limited company is being closed down, the contractor submits a final tax return to HMRC, which details all of the final activities of the company. HMRC has a window of 12 months to investigate the business if they suspect there is tax still to pay.
Typically, if HMRC suspects there to be tax to reclaim, it could start a Compliance Review into the PAYE records of the contractor’s limited company. This could then lead into an IR35 investigation – not a good place for a contractor to be.
Likelihood of investigation and reclaim?
Although HMRC may try to find a contractor liable for payments on past contracts they have deemed to be outside of IR35, its track record to date suggests it does not enjoy a great deal of success on retrospective tax investigations.
Once the company is closed, HMRC can seek to reopen the company, but it won't have any money to pay any IR35 debts anyway. In which case HMRC may try and exercise legislation known as ‘Regulation 72’. This enables the transfer of unpaid tax debts to an employee or director. However, it is incredibly unlikely that HMRC could make these rules stick in the case of a contractor’s limited company being unable to pay IR35 debts.
As long as a contractor can demonstrate that they have applied the necessary due diligence when determining their IR35 status, HMRC would not be able to transfer the debt to the contractor personally. HMRC would need to prove the tax was deliberately not paid, and there was wilfullness at play. The burden of proof is on HMRC to show that the contractor knew they were inside IR35, but decided not to pay the tax. This is a very high hurdle for HMRC to overcome.
One concern the contractor may have, as they transition past April 2021, is the client tells them that they think historically the contract should have been treated an inside IR35. If the contractor ignores this, and doesn't pay IR35 taxes for the period prior to April 2021, does this mean they are wilfull, triggering potential regulation 72 exposure?
The answer is maybe, and depends on the facts. Bear in mind that the clients assessment is just an opinion and not binding in law. An alternative independent assessment, that indicated an "outside IR35" position, should be enough to prove that the contractor hasn't deliberately chosen to not pay tax due.
Burying bad news
HMRC has 12 months from the submission of the final tax return to investigate the limited company. The taxman also has the option of investigating an individual contractor’s tax affairs up to six years after they have ceased trading.
Ignoring IR35 and tax liabilities by closing down a contractor limited company is not a solution that will always have a happy ending for contractors if they have deliberately not paid taxes that they knew were due. And frankly, neither should it be a solution. Taxes due under IR35 should be paid, not evaded.