HMRC’s IR35 Fishing Expedition – What to do if you receive a letter

IR35

Towards the end of August, HMRC sent letters to approximately 1500 contractors who had worked for GlaxoSmithKline (GSK) during the tax year 2018/19. The letters stated:

“It is our view that the contract between your PSC and GlaxoSmithKline (GSK) comes under the off-payroll working rules ‘IR35.’”

A Contractor's Guide to Demonstrating You're Outside IR35: Click here to download >>

The letters went on to say that contractors who disagree must respond in writing by 19th September, to offer instructions on how to calculate the additional tax and NI, and to threaten further review and possible penalties if their instructions are not followed.

This is worrying for a number of reasons, most notably that HMRC has not examined the working practices of these 1500 contractors, and therefore cannot know that they were inside IR35. Many commentators share the view that this is an attempt to intimidate contractors into accepting HMRC’s position, and ultimately paying tax and NI that they may not owe.

What should you do if you receive a letter?

It’s unlikely that we’ve seen the last of these tactics from HMRC, so even if you’re not in the firing line this time, it’s possible that you will be in the future. If you receive a letter like this from HMRC, what should you do?

Don’t panic

The wording of these letters is intentionally alarming, but the situation is not necessarily as dire as it may seem. Just because HMRC say you were inside IR35 does not mean that you were.

Your instinct may be to contact HMRC right away, either to tell them they’ve got it wrong, or to make arrangements to pay the additional tax and NI. We advise against this course of action; you certainly shouldn’t ignore the letter, but the situation requires expert handling so you should seek expert help before you respond.

Where to go for help

It’s best practice to have each contract professionally reviewed by an IR35 specialist and if you followed this practice the provider who reviewed the contract in question will be able to help. Depending on which provider and which service you used, and assuming you followed their advice, representation may be included; check with the provider when you contact them.

If you don’t have an existing relationship with an IR35 specialist, your specialist contractor accountant should be able to recommend an expert who can help you.

Check your IR35 status

These more aggressive tactics by HMRC underline how important it is to be sure of your IR35 status. As mentioned above, best practice is to engage an IR35 specialist to review each contract. This will provide a higher level of certainty, and possibly secure expert support if your status is challenged.

Online tools

HMRC are keen for contractors and engagers to use their online tool, Check Employment Status for Tax (CEST) to confirm their IR35 status. However, CEST has been widely criticised for ignoring some case law and giving inaccurate results. HMRC have promised to update the tool, but there is no guarantee that the update will resolve its many issues.

Having said that, it’s easy to see the appeal of an online tool that can quickly check your IR35 status, and alternatives to CEST are available. For example, IR35 Shield is an online tool that has successfully replicated every tribunal decision and is backed by insurance, should the result prove to be incorrect in the future.

The importance of professional IR35 reviews

Even if the contract is finished and you’ve already received a letter from HMRC, it’s still not too late to get a professional contract review. For example, respected experts Bauer and Cottrell will look at the reality of your working practices as well as the written contract, and give you an expert opinion of whether you’re inside or outside IR35. They’ll also be able to advise you on how best to proceed, whichever side of the line you fall.

For those who are not in this situation yet, it’s more important than ever to make sure you’re protected, and getting each contract professionally reviewed is a basic step towards that goal. If you’re contracting through a PSC, we strongly recommend that you seek a professional review by an expert IR35 specialist each time you start a new contract, and each time your contract is renewed.

Collect evidence of your IR35 status

It isn’t enough to be sure you’re outside IR35, you have to be able to prove it, and that means collecting evidence to support your case. This is doubly important, because HMRC often tries to claim “carelessness” to increase the enquiry period from the normal four years to six, and if you have no evidence it will be difficult to argue that you took appropriate care.

Keep an evidence file, containing everything that supports your status so you have it to hand easily when necessary. For example, retain emails to your client, stating that you’re working from home or remotely, or informing them of any absences. Keep details of contractors who have agreed to act as a substitute, and retain evidence where you’ve corrected errors at your own cost.

For more information on IR35 best practice, refer to our Guide to Demonstrating You’re Outside IR35.

What if you should be inside IR35?

Some contracts are clearly inside IR35, and no amount of “tweaking” the paperwork will change that. If an IR35 professional advises that you’re inside, it’s important that you act accordingly and pay the correct tax and NI.

If you’ve received a letter from HMRC about a historical contract where you operated outside IR35 and you think you should have been inside, we’d still advise you to seek advice from an expert before you respond, both to confirm your assessment of your status, and for advice on how to handle the situation.

If you have any questions, or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

  

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