Contractors who involve expert IR35 advisors early can prevent HMRC investigations turning into full blown IR35 status reviews. This is according to Andy Vessey of Qdos Consulting, who says he has seen such intervention prevent hundreds of HMRC compliance visits from reaching tribunal stage.
“HMRC can initiate investigations into the tax affairs of contractors’ businesses under numerous guises,” explains Vessey. “And a simple employer compliance visit by a local inspector can quickly escalate into a full blown status enquiry involving an IR35 status inspector.”
But, according to Vessey, involving an IR35 expert right from the start can quickly demonstrate to HMRC’s inspectors that there is no case to answer. He provides four examples of how contractor advisors have shown HMRC that the contractor is not a disguised employee, but a genuine contractor.
Contractors in business on their own account are almost certainly outside IR35
“The Primary Path and ECR Consulting cases demonstrated the importance of being ‘in business’ as an IR35 defence,” continues Vessey. “This can be easy to demonstrate early on and head off a status review, if the right evidence is identified and communicated correctly.”
Vessey cites an example of an IT contractor who had been targeted by HMRC for a Pay As You Earn (PAYE) employer’s compliance review, but because the contractor involved their professional advisers from the outset, the case never even progressed to a meeting and was handled completely by correspondence.
Vessey explains: “The contractor in question was clearly ‘in business’ and ticked all the right boxes, which included:
- The contractor limited company had a website
- Some client projects were performed on a fixed-price basis
- The contractor had a dedicated and well equipped home office
- The company had made a substantial investment in computer equipment required to fulfil client projects.
“This evidence was presented in a dossier to the HMRC inspector with a recommendation that there was no status case to answer. The inspector agreed, and the review was halted before it even got started,” adds Vessey.
Putting substitution clauses into practice can help place a contractor outside IR35
The next example from Vessey is about a freelance haulier trading through a limited company and providing his services to a single client, who provided a tractor-trailer for him to drive and even worked out the routes for him.
“On the face of it, the haulier had many of the features you might expect of a disguised employee, and that’s what HMRC thought when the inspector was conducting a compliance review,” says Vessey. “But on further examination it was clear that this was a genuine contractor.”
Vessey had spotted the substitution clause in the haulier’s contract and asked the client if it was genuine: “The client said they’d have no problem if the haulier exercised his right of substitution and sent along an alternative driver as long as the replacement was suitably qualified. So that’s what he did!”
When presented with the contract that included a right of substitution clause and the evidence of the haulier having provided a substitute, and paid that substitute from his company, HMRC agreed that there was no status case to answer.
Surprise visit by status inspector ‘foiled’ by having IR35 expert to hand
“I was representing an IT contractor at what we thought was to be a routine compliance review meeting, when the inspector unexpectedly brought her status inspector colleague,” explains Vessey. “Fortunately, the contractor and I had prepared thoroughly for the meeting, so I already knew that the contractor had hired a part-time assistant on a recent contract.
“I used this evidence to confirm that there was no personal service and the contractor had a genuine right of substitution. The status inspector accepted that there was no IR35 case to answer and no further action arose as a result.”
Vessey says he has also acted on behalf of contractors who had not had the benefit of a professional advisor at a first meeting. Although their cases have been similar, the status inspector had taken further action because the contractor did not have the knowledge to close down the review there and then.
Contractor business, taken in the round, is genuine and not employment
Tribunal judges often consider a contractor’s business ‘in the round’ when considering IR35 cases. The ECR Consulting and Primary Path tribunal decisions are both examples of when the whole picture has proved a contractor’s status as outside IR35, rather than the isolated facts on which HMRC often focuses.
Even complex companies can attract the attention of an inspector, as Vessey explains: “The final example is one where there were two active directors of a contractor limited company with multiple income streams from IT contracting, landscape gardening and property letting.”
Despite the obviously varied income streams, the company came to the attention of a status inspector. Vessey explains why: “IR35 is considered on a contract by contract basis, so one of the landscape jobs or a single IT contract might be inside of IR35.”
But, once again, Vessey was able to demonstrate to the status inspector that the case was not worth pursuing. “I presented the HMRC inspector with the evidence that, in the round, the two contractors were running a genuine business. The inspector agreed and ended the investigation.”
Vessey says: “The low levels of IR35 cases being taken to tribunal is more a reflection of how IR35-savvy contractors have become, rather than any lack of effort on the part of HMRC, as these examples demonstrate.
“Having an experienced and expert professional advisor on hand to deal with any HMRC enquiries and investigations can prevent an inspection from turning into a full blown IR35 status review.”