With the private sector off-payroll changes set to go ahead in April 2020, some ‘outside IR35’ contractors may be forced to work ‘inside IR35’ if their clients are reluctant to take on the potential risks of making incorrect employment status decisions – at least for the time being.
Dozens of major contractor hirers have already decided to stop using limited company contractors altogether, whereas others say they will still hire PSCs, but are reluctant to declare their workers as being ‘outside IR35’.
What happens if you have been working for a client via your own limited company (outside IR35), but have been told that you can only continue working for the client if you accept inside IR35 status from before the April 6th, 2021 legislation start date?
If you accept this new status, doesn’t this imply that for the duration of your current contract with the same client, you should always have been operating within the IR35 rules?
(Please note that the original April 2020 start date was deferred until April 2021 due to the COVID-19 crisis).
What does HMRC say?
HMRC have said, repeatedly, that it won’t use information collected as a result of the off-payroll implementation to take retrospective action against individuals – unless suspected fraud has taken place.
This statement appears in the latest piece of official literature – a ‘contractor factsheet’ published in January 2020.
“… HMRC will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.”
What’s the problem?
The problem is that there is a massive lack of trust in HMRC within the contracting industry, not only as a result of the IR35 rules – which have plagued contractors for two decades now but also the scandalous Loan Charge.
The Loan Charge was created to retrospectively tax individuals who participated in loan-based payment schemes in past tax years – despite such arrangements being legal at the time. Over 50,000 people are believed to be affected by this legislation; the taxman has persisted in going after individuals rather than the promoters of such schemes.
What’s to stop HMRC deciding to retrospectively tax those who contracted on an ‘outside IR35’ basis in the past, but were forced to accept an ‘inside IR35’ status post-April 2020?
How far back can HMRC investigate?
Although HMRC says that it won’t investigate taxpayers for previous contract arrangements, they can – in theory – investigate the tax affairs of a company going back up to 4 years (6 years for ‘careless’ behaviour). If they believe there has been deliberate tax evasion, they can potentially go back 20 years.
‘Normal’ IR35-related enquires are retrospective in nature
Seb Maley, CEO of Qdos, makes an important point relating to HMRC enquires which are not connected to the new ‘status determinations’ which come into play after April 2020 in the private sector.
“The statement doesn’t mean that HMRC will not open up retrospective enquiries that are not connected to a status determination made by the end-client. By their nature, most IR35 enquires are retrospective, meaning the risk for contractors will continue to exist.”
“Given HMRC could change its mind or find a reason to suspect ‘fraud or criminal behaviour’ – a phrase which is very much open to interpretation – contractors need to be confident that previous and existing contracts are IR35 compliant.”
What can you do to protect yourself?
Despite the understandable lack of trust, one must hope that HMRC will be true to their word, and only undertake investigations in rare circumstances where criminal behaviour is suspected.
Following publication of HMRC’s policy paper in October 2019, Jon Stride, Co-Chair of the ATT’s Technical Steering Group, said: “This is a high bar to clear and is a welcome pragmatic approach by HMRC. It also builds on earlier statements that the reforms are not intended to be retrospective.”
However, importantly, these assurances have not been written into law. They exist merely in guidance notes.
So, to cover yourself further, we recommend you are able to prove that you have taken reasonable steps to demonstrate that you are working outside IR35.
- Be familiar with what IR35 and the off-payroll rules are, and how they will operate in practice.
- Make sure your client and agent are fully aware of the forthcoming reforms.
- Make sure you can demonstrate that you are working ‘in business on your own account’ – i.e. in the manner of a business person, rather than an ’employee’ (this is the crux of IR35).
- Undertake professional reviews of both your contracts and working practices, on a regular basis.
- Ask for a Confirmation of Arrangements document to be drawn up – this shows that each party in the contractual chain agrees (in writing) that your working practices fall outside IR35.
- Consider taking out tax protection insurance – just in case. This will cover you against the costs of professional representation if HMRC decides to look into your tax affairs.