Contractors unsure about their IR35 status and whether their contract is ‘IR35 friendly’ have the option to call HMRC’s IR35 Helpline and ask for a contract review by the taxman’s Contract Review Service. Although we advise strongly against this!
If HMRC concludes that your contract is outside IR35, then you will receive a unique reference number that will remain valid for three years. But, if your contract is not outside IR35, and HMRC considers the contractor to be at high risk of being inside of IR35, it could trigger an IR35 enquiry - this could last years and end up costing you substantial amounts of money in professional fees, back taxes, interest and penalties.
HMRC only considers current contracts, and not one you are considering, making the service rather pointless - because if there is risk of IR35 applying it is too late for you to do anything about it.
For these reasons, it is better for you to seek a contract review from independent specialists before accepting and starting any contract. Then any issues can be identified and fixed before starting the contract.
The first port of call for contractors is to get use the free online IR35 test built by ContractorCalculator, which will diagnose any IR35 issues for free and takes just 15 minutes to use.
HMRC’s guidance on how their contract review service works
HMRC’s most recent intermediaries legislation (IR35) guidance that was issued in June 2014 instructs you to start off by calling the IR35 Helpline and asking for a contract review.
You are then asked to submit a quite frightening amount of detailed information, and HMRC says: “It’s up to you to provide all the information. If you don’t or can’t do so, it may not be possible for HMRC to form an opinion.” The information requested includes:
- Copies of the contracts
- Any documents relating to working terms and conditions
- Any written statements by the client or contractor about working practices
- Details of how the contractor found the contract, the recruitment process and a copy of the contract advert
- A description of the services the contractor will supply, plus details of any specific contractual requirements and obligations
- If the contractor had to tender for the work, a copy of the tender
- Any contractual details not actually written into the contract
- An explanation of how the work is allocated on the contract, the role of the contractor, and whether the contractor is part of a team
- Other relevant information, such as the number of contracts completed during the year and the clients’ details, plus
- The contractors National Insurance (NI) number, HMRC reference number and the contractor limited company’s postcode.
If you consider the above to be a massive fishing expedition by HMRC, they would not be far wrong, especially as HMRC says it may wish to talk to your client. However, HMRC warns that it may not be able to provide an opinion if it does not have sufficient information.
What happens if the contract is outside IR35
Should HMRC find the contract outside IR35, then you are given a unique reference number that lasts for three years.
If you are subsequently investigated for IR35 by HMRC, you can produce the reference number and in theory HMRC will suspend the enquiry while they look into the facts again.
HMRC will then close the enquiry if it can confirm that the original contract review is typical of your terms and conditions, the information provided by the contract is accurate and “the evidence shows that circumstances haven’t changed”.
The process when HMRC believes IR35 applies
HMRC’s guidance does not actually say what happens if it finds that your contract it is reviewing is inside IR35. However, it does include a section about what happens if you disagree with HMRC’s opinion.
Rather ominously, the guidance states that if you dispute HMRC’s findings, then the case will be passed to “the local IR35 Inspector”. In theory this will only be done with your full permission.
Even more worrying is the fact that that IR35 Inspector may go back to your client to gain more evidence. The final line of defence for you is to appeal the decision of the IR35 Inspector if the taxman believes that IR35 applies, which adds more time and expense.
Requesting an HMRC review could be unwise
Because of the risks of getting on HMRC’s radar and being found to be at high risk of IR35 applying, seeking a contract review from HMRC could be considered to be an unwise move.
Ideally, you should seek an independent IR35 review from IR35 specialists - and contractors can start by getting a free online IR35 assessment using ContractorCalculator's IR35 tool located at IR35Testing.co.uk. The tool asks 101 questions, then analyses your status by comparing your answers to decades of case law.
Whilst there is an attraction to having a three-year amnesty if your contract is found to be outside of IR35, there is still the risk that HMRC may still find your contract is inside IR35, leaving you to spend time and money proving that it is not. It is for this reason that virtually no-one uses the HMRC service.