HMRC’s IR35 Contract Review Service should be avoided by contractors at all costs. There is no benefit, and potentially plenty of harm, to be gained when using the ‘service’. And this is despite the hard sell the taxman has given the reviews in HMRC’s new Intermediaries Legislation (IR35) guidance document.
Why would a contractor choose to ask HMRC to review a contract that’s already started? HMRC’s rules say that it can’t give opinions unless a contract is ‘existing’, which we assume to mean it is live? Surely the point of a contract review is to ensure the contract itself and the proposed working arrangement are outside IR35 while changes can still be made and before the contractor starts work?
And can HMRC’s Contract Review Service be trusted to keep confidential the details of contracts it finds inside IR35, and not share contractors’ details with their compliance colleagues?
On the face of it, the new guide that replaces the old FAQ section is a reasonably helpful overview of IR35 and how it works, with plenty of links back to more detailed resources for both contractors and their clients.
The section on the Contract Review Service confirms that if a contractor’s contract is considered to be outside IR35, the contractor will receive a unique reference number to present to any inspector if they become subject to an IR35 review by HMRC. Any new investigation will be halted if HMRC confirms various facts have not changed. OK so far.
But slightly worrying is the enormous list of information HMRC requires to provide an opinion on a contract. It’s much more than any private sector IR35 specialist is likely to require. In fact, the taxman requests everything an inspector would ask for when conducting an IR35 investigation.
That aside, if the taxman decides a contractor’s contract is outside IR35, then assuming the contractor’s circumstances don’t change, HMRC confirms in writing that the contractor can rely on this opinion. That’s another plus point.
It also says that if a contractor’s contract is deemed to be inside IR35, the contractor can ask for their case to be referred to an IR35 specialist inspector for a second opinion. We are told this won’t happen without the contractor’s permission. Another warning bell.
However, HMRC does not explicitly say that if its opinion is that a contract is caught by IR35, then that decision is binding. So, technically, a contractor could decide not to opt for a second opinion and take the risk of not operating IR35, even though HMRC says the contractor is caught by it.
But let’s be serious. Are we really expected to believe that HMRC is able to erect and maintain such strong internal ‘Chinese walls’ that the local compliance office won’t find out about someone that the Contract Review Service has found to be inside IR35? Can we be sure that someone in the IR35 team won’t receive the nod to check the contractor’s corporation tax self-assessment form to check they have made their deemed payment a year down the line?
Furthermore, what is the point of a contractor actually asking for a contract review during and not before the contract starts? HMRC makes it quite clear that it will only review ‘existing’ contracts.
Of course, you could assume that HMRC believes that contractors are honest taxpayers who simply want to establish their tax situation with some certainty, and pay an additional 25% of tax on their income. And not that what every contractor wants to do is everything possible to avoid being caught by the unfair and punishing IR35 legislation.
Don't stick your head above the parapet and use HMRC's Contract Review Service
Dave Chaplin, ContractorCalculator
Contractors adopting best practice will get an external IR35 expert to review their contract and working arrangements before they sign the contract. They will be given practical advice on aspects that need to be changed and working practices to adopt to stay outside the legislation - all things that HMRC will not provide. The contractor will also have insurance if HMRC comes knocking. The only bonus of using the Contract Review Service is the three years amnesty HMRC promises. But if you are already outside IR35 and insured, why bother?
The advice is simple: Don’t stick your head above the parapet and use HMRC’s Contract Review Service. You will get advice that’s too late to be of any help to you and risk having your details passed over to an inspector who could initiate an investigation.
Keep to IR35 best practice. If you don’t already use an IR35 expert to review your contracts, and don’t have tax investigation insurance or PCG membership that comes with tax investigation insurance, then take action.
Not to do so could prove to be a costly mistake. Almost as costly as falling for the taxman’s big sell about the benefits of using HMRC’s contract review service.