HMRC Make Three Massive IR35 Promises
To allay contractor fear of future investigations HMRC have made three huge IR35 promises to contractors. Many contractors have been worried that if they accept an inside IR35 contract this will mean they have always been inside IR35 for tax purposes.
This would leave them wide open to an IR35 investigation by HMRC for back tax and maybe penalties and interest. This may not be just for the current contract but for previous contracts too. That could be very expensive.
So, rather than take that risk contractors have been quitting their contracts rather than taking PAYE roles at their current clients’.
Contractors Questions on IR35 Promises
- What assurances are HMRC giving contractors over IR35 investigations?
- How cast iron are these three HMRC IR35 promises?
- Do the provisos in the IR35 promises give them wriggle room to investigate contractors in future?
- What good were previous HMRC IR35 promises to the NHS?
- How easy would it be for HMRC to go after contractors now working inside IR35 for back tax?
- Why is it even more dangerous for contractors who have tested inside IR35?
- What is HMRC’s track record on chasing contractors for back tax?
- Why do contractors not trust HMRC’s IR35 promises?
- What will contractors do without further IR35 reassurances from HMRC?
What assurances are HMRC giving contractors over IR35 investigations
So, HMRC have been giving hem cast iron reassurances. Here are the three promises made to contractors.
IR35 Promise 1 – No man of woman born will be investigated for back IR35 tax
Well that’s a pretty safe cast iron promise isn’t it? After all every man is born from a woman. Contractors will be feeling much safer already.
IR35 Promise 2 – There will be no back investigations of contractors until Great Birnam Wood shall come to Dunsinane Hill.
Well, that’s pretty cast iron. How can a wood move. The trees are rooted to the ground.
IR35 Promise 3 – “HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour”.
How cast iron are these three HMRC IR35 promises
Well that seems pretty clear. Contractors can feel pretty safe now. But hold on now. What about that proviso. Isn’t tax evasion fraud and a criminal offence? Would declaring yourself as inside IR35 when you are really outside be fraudulent?
Perhaps that third one is not as cast iron a guarantee as the first two. And it’s not exactly a promise either. They just say that they have “taken a decision” not to investigate contractors for back tax.
Couldn’t they just change that decision in the future? This is more just a statement of current intent rather than a promise. They could easily change that intent in the future and this statement would not be wrong.
It’s a bit like when politicians say “We have no current plans to……”. That leaves them wriggle room to have future plans to do whatever it is.
So also does this statement from HMRC about IR35. It gives them wriggle room to change their minds.
Do the provisos in the IR35 promises give them wriggle room to investigate contractors in future
Have HMRC made any reassuring statements before with provisos added that they have used to get out of it.
Well, yes they have. They made a promise that if organizations used their Check Employment Status for Tax (CEST) to test contractors for IR35 they would stand by the results. That’s even if contractors were later shown to have been inside IR35 all along.
What good were previous HMRC IR35 promises to the NHS
So, the NHS tested all their contractor using the CEST tool. Those contractors inside IR35 had to pay PAYE tax and National Insurance. Those contractors testing outside IR35 were able to continue to operate via their personal services companies.
So far, so good, right?
HMRC fined the NHS £4.3m for misuse of the CEST tool.
Who decided they misused it?
It was HMRC!
HMRC are such experts in IR35 that they have lost 80% of the cases that they have brought against contractors at the lower Employment Tribunal.
But the Government have allowed them to be the accuser, the police, the judge and the jury in all IR35 cases.
Oh, and they are the Appeals judge too.
How easy would it be for HMRC to go after contractors now working inside IR35 for back tax
It would be very easy, if HMRC were not getting in the taxes they were expecting from the IR35 changes to send out a letter to all contractors at all those sites where contractors were operating outside IR35 and are now operating inside and paying PAYE doing exactly the same work. The letter or email could just ask them to pay their back taxes or they would start an investigation.
Why is it even more dangerous for contractors who have tested inside IR35
For contractors at companies where they are testing contractors using CEST and failing them all the risk is even worse.
That’s because the results of all those CEST tests must be sent to HMRC ‘for future reference’. So, HMRC know all he names of those contractors who were previously operating outside IR35 but tested inside IR35 while doing exactly the same work in exactly the same way.
HMRC could simply send them all out a letter asking them to pay heir back taxes as they were obviously operating wrongly outside IR35 before. That would be tax evasion and so would be covered by HMRC’s proviso.
What is HMRC’s track record on chasing contractors for back tax
Have they done this sort of thing before?
Yes they did it with GlaxoSmithKline’s contractors. HMRC sent all 1,500 of them a letter (or was it an email?) saying that it had come to their attention that they were all wrongly operating outside IR35 when they should be inside.
It demanded that all the contractors pay the full PAYE tax and National Insurance for the previous year. It also gave them just a few weeks to appeal this.
Surely this must come under a blanket assessment which is not allowed by the rules. And this is a blanket assessment of contractors without even testing a single one of them.
Why do contractors not trust HMRC’s IR35 promises
I think that one can see from the above contractors’ reasons for not trusting HMRC’s semeing reassurances. They have a proviso attached to them that would let them go back on the reassurances they have given without breaching the words of the reassurance.
If HMRC really want to stop the flow of contractors quitting their client companies rather than work on a PAYE basis they really must give more cast iron assurances than they are currently giving.
That proviso invalidates all of the previous reassurance and allows them to investigate any contractor who was previously operating outside IR35 and is now operating inside.
What will contractors do without further IR35 reassurances from HMRC
If they don’t make a more cast iron promise then contractors are going to continue to quit their contracts rather than go PAYE. Older contractors are retiring. Others are looking for work abroad. Others still feel that they can wait this out to see what happens. Some of the work that contractors are now doing will be sent offshore.
And that will be tax that HMRC lose which will have to be offset against the gains from the IR35 changes.
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