We take a look at the latest developments with IR35, where we stand at the moment and what can be expected in the future.
Is there a high risk of enquiry at the moment?
The risk is certainly higher than it has been for several years. HMRC have significantly increased their activity and the total of 12 enquiries in 2009/10 jumped to 256 in 2012/13. Whilst official figures for the last year have not been released, the upward trend does seem to be continuing.
Over the summer we were averaging between 2 and 3 new investigations a week on behalf of our clients.
We are probably still some way off the numbers seen in the early years of IR35 (there were 1,166 in 2003/04) but there is no doubt that HMRC are taking IR35 seriously again.
What are HMRC focusing on?
The legislation itself hasn’t changed and HMRC will still look at the same issues when conducting an IR35 enquiry. The three key areas are personal service/substitution, control and mutuality of obligation, but naturally there are numerous other factors that would be taken into consideration.
The written contract will always be the first port of call, but HMRC are very quick to want to engage with the end user to ascertain the ‘true facts’ of the engagement.
What are the chances of winning an IR35 case?
We have found that HMRC are more aggressive now than they were in previous years. This is partly because they pledged to close enquiries down as quickly as possible, so they are keen to get down to the nitty gritty details early on in an investigation. This includes speaking to the end client, which is always dangerous.
HMRC also now have specialist teams working the IR35 cases, so there is a much more joined up approach with officers sharing information.
That being said, we are still confident in winning the enquiries we are handling for clients. If a contractor is in a reasonably good position to start, the chances of success will be high – IF (and it’s a big if) they have good professional representation.
Will IR35 be scrapped?
It’s unlikely – at least in the short term. The government knows that if IR35 were removed completely there would be an influx of workers incorporating limited companies, thus depriving the treasury of a significant amount of tax and NI.
Long term the government want to merge tax and NI together, which would effectively make IR35 redundant – but this is no small task and probably several years away from happening.
Of course, you never know what changes a new government will implement, but any dramatic change to the legislation is improbable.
What’s happening with the Business Entity Tests?
The Business Entity Tests (BETs) were brought in back in 2012 as a way for contractors to determine how ‘at risk’ they were from IR35 being an issue. However, they caused a lot of confusion and never really served the purpose they were designed for. The fact was that the vast majority of contractors would have been ‘high’ or ‘medium’ risk – but that had no impact on their actual IR35 status.
It has recently been confirmed that the BETs will be scrapped in April 2015, which seems a sensible decision. HMRC haven’t confirmed whether there will be anything to replace them, but what we may see is a version of the Employment Status Indicator. This is an interactive tool, currently for sole traders rather than limited companies, and would actually give an indication of what a contractor’s IR35 status was.
What should contractors do to improve their position?
Obviously the starting point should always be a review of the written contract and actual working practices. Ensuring these are compliant and documented will ensure an enquiry gets off on the right footing.
Then it’s really about compiling evidence. So, the reviews of the contract and working practices highlighting all of the positive parts, plus any other information that points to you being an independent contractor and in business on your own account. This could include things like proof of business insurance and any documentation that sets you apart from permanent employees at your end client (security badges, phone lists etc.).
Seb Maley is a director of Qdos Accounting and has worked with IR35 for over 10 years, handling numerous enquiries on behalf of contractors
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