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IR35: a new approach for enquiries?

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On 22 October 2019, HMRC published a policy paper, HMRC issue briefing: reform of off-payroll working rules, about the April 2020 IR35 changes in the private sector. The proposed changes are now widely publicised. However, clarity about retrospective enquiries by HMRC, particularly for contractors, is welcome.

The IR35 rules are often applied subjectively. Many contractors are concerned that if the end user reaches a different conclusion on their employment status, any change in status could lead to an HMRC enquiry. We can expect some businesses to apply a blanket status policy or reach a different conclusion based on their own risk procedures. 

HMRC’s paper states that it will only use information received after April 2020 to open an enquiry if it has ‘reason to suspect fraud or criminal behaviour’. The use of the words ‘fraud’ and ‘criminal behaviour’ are interesting in their own right. HMRC’s ‘behaviour’ categories for errors in its Compliance Handbook do not use these terms: instead, errors are categorised as ‘innocent, careless or deliberate’. In the past, deliberate behaviour was seen as akin to fraud. However, many who manage tax enquiries on a regular basis will testify that this is no longer the case. HMRC’s handbook was updated to remove the word ‘intention’ from the definition of deliberate (see CH81150). In contradiction, the everyday definition of fraud always includes an ‘intention to deceive’. Criminal behaviour is, therefore, a high bar to clear.

Whilst HMRC’s policy statement appears to be good news, there is concern that it is out of sync with its general enquiry powers and its current enquiry activity. 

HMRC will still have the power to open enquiries into contractors’ personal tax returns, and/or a PSC’s corporation tax returns. In practice, when HMRC wants to consider whether IR35 applies, we see what’s called a ‘compliance check’ into the individual’s status, similar to a PAYE/NICs review. This compliance check has no legislative basis, but it has led to many contractors being subject to long, stressful enquiries.

So does the 22 October announcement herald a new approach to IR35 enquiries? Is this a partial amnesty for those whose status changes from April 2020? Could and should the amnesty apply more widely to those already under enquiry who also show no signs of ‘fraud or criminal behaviour’?

To be pedantic about HMRC‘s wording, it does say that organisations’ decisions about whether workers are within IR35 will not automatically trigger an enquiry into early years (my emphasis added). This falls short of a guarantee of protection from such enquiries. Contractors should consider their position carefully and seek their own independent tax advice. Organisations making decisions on the status of contractors must document their decisions carefully.

With the November 2019 Budget cancelled and no sign of the final legislation or HMRC guidance, many will join the chorus calling for a delay to the private sector roll-out. However, HMRC estimates that this reform will generate around £3bn, so the next government, whoever it may be, may well choose to introduce the rules as planned. 

Issue: 1465
Categories: In brief