At the last meeting of the IR35 Forum in January, HMRC confirmed that it is on course to hit 230 IR35 enquiries by March of this year which the department had previously committed to publicly.
IR35 Forum members have noticed, as well as the writer, that in recent months there has been a distinct acceleration in the number of new IR35 enquiries involving those contractors who ply their trade in the public sector. HMRC however maintain that it has always carried out compliance checks in the public sector and that last year’s review of public sector appointments by the Treasury did not lead to the department considering the IR35 risk in this area for the first time.
It is true that HMRC have historically conducted IR35 enquiries where the end client has been a public body but it is surely no coincidence that the political and media fed hysteria that led to last year’s attack on contracting in the public sector has sharpened the Revenue's focus in this area.
We were told back in May 2012 that the new style IR35 enquiries were to be concentrated on those considered to be high risk without fully knowing what the criteria was to make a contractor high risk. Well now we are getting a better picture of what that criteria is, or at least a constituent part – working in the public sector.
Possibly never before has there been so much intelligence readily available to HMRC in this area to enable the Revenue to cherry pick those freelancers it wishes to investigate further.
A good number of contractors operating in the public sector, that have had the misfortune of being selected for enquiry and by whom the writer has been approached to defend them, have not had the comfort of a tax enquiry insurance (TEI) policy. Consequently they end up having to pay professional fees at normal rates in excess of £100 per hour plus VAT.
HMRC's opening letter requests copies of all contracts for the period of enquiry, together with evidence that led the freelancer to consider their contracts to be outside of IR35. For an IR35 expert to acquaint themselves with the contractor's business, review all contracts, assemble evidence and formulate all of this into an initial response is in itself time consuming and can reach up to 5 – 6 hours of their time. So that's around £ 600 – 700 (net) or more out of the personal service company coffers just for starters.
Should HMRC not be convinced by the quality of evidence or wish to test such evidence, then further time and fees will be incurred by the poor contractor. If the Revenue want to interview both the end client and the contractor then the costs rise even further. Clearly the longer the enquiry lingers the more out of pocket the freelancer becomes. To compound the misery the professional fees will not be deductible for corporation tax purposes.
Just to add some measure of balance, a number of other recent enquiries that the writer has knowledge of involve banks and multi national companies as the end clients, but the signs are that public sector enquiries will continue to escalate for the foreseeable future.
For the sake of the price of a TEI or a tax loss insurance policy contractors can save themselves the agony of having to fork out a few thousand pounds and be secure in the knowledge that the insurer will meet all their adviser’s costs. This will also give the freelancer the confidence and fortitude to tackle HMRC head on without having to be conscious of professional fee's racking up the longer the enquiry continues.
Professional costs invariably play a significant role in a taxpayer’s decision as to whether or not to continue battling with HMRC, particularly when an enquiry has been running for a lengthy period. TEI or tax loss insurance removes that barrier to a contractor's decision making and allows them the freedom to pursue their fight with the Revenue for as long as it takes.
The time to act is now because you could be the unlucky one invited to an IR35 audience with HMRC in the very near future.
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