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Contractors under pressure: HMRC re-opens IR35 enquiries and looks to open new cases, says Qdos report

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With the effects of the pandemic on the UK economy, it is not surprising that HMRC’s compliance activity seems to be increasing in all areas, according to IR35 specialist Qdos.

“The Treasury will be looking for the effects of HMRC’s compliance activity to contribute to its rapidly depleting resources, particularly if such contributions are derived from perceived tax avoidance,” said the firm in a statement.

IR35 enquiries that were previously paused are now being resurrected, said Qdos. “Albeit, HMRC seems to be adopting a more tentative approach given the effects of the pandemic. HMRC is also starting to open new enquiries. Qdos have been notified of a number of claims over the last few weeks.”

One of the latest letters the firm has received states:

“I am writing to ask whether you are ready for HMRC to resume compliance activity regarding our IR35 enquiry (reference above). Please let me know at your earliest convenience so that I may progress the review to the next stage…”

The letter is accompanied by some general information relating to support that can be provided by HMRC in light of the pandemic. It also gives the client under enquiry the opportunity to divulge any circumstances caused by Covid-19 which may make it difficult for the client to have the enquiry re-opened.

Back in March of this year when the NHS made a call for retired doctors and nurses to come back to work to help with the pandemic, these workers were targeted by “unscrupulous” tax avoidance schemes.

HMRC was aware of this and advised on their website that NHS workers who think they may have been targeted by a scheme to check how much tax they would normally pay on their income, by using HMRC’s online tax calculator. 

“Anyone entering into these arrangements after a Spotlight is published can expect an HMRC inquiry and financial penalties,” warned Dawn Register, partner in tax dispute resolution at accountants BDO, in an FT report.

While Iain Campbell, secretary of Independent Health Professionals, a trade body for freelance healthcare workers, welcomed HMRC’s action, he added that avoidance schemes had begun targeting healthcare workers in 2017, after changes to the off-payroll working rules in the public sector led many workers to take cuts in take-home pay.

“We need to tackle this at the root cause,” he said according to the FT report.

Is HMRC likely to reopen all previous enquiries?

“Whilst not all of our IR35 enquiries have been reactivated we anticipate that it is only a matter of time until they are all re-opened,” said the Qdos report. “This is unless there are any circumstances, which HMRC accept, where clients have been adversely impacted by Covid-19. An example of which being ill-health.”

Remember that with new IR35 enquiries being opened now prior to April 2021, HMRC will be making their enquiries as the IR35 rules currently stand. This means that contractors themselves will be liable for the additional tax if determined to fall inside of IR35 by HMRC.  Because of this, it is still imperative to ensure that you have your contract and working practices reviewed for each engagement.

Corporation Tax and Section 9A

Not only are there new and previous enquiries to contend with, but HMRC is opening Corporation Tax and Section 9A enquiries, and continues to pursue contractors involved in what HMRC perceive to be tax avoidance schemes.

According to Qdos, for those contractors with short term contracts and those who undertake multiple contracts for multiple clients, it is worth considering keeping their limited company open.

“Whilst some contracts may be considered to fall inside of IR35, some may not, and it is possible to undertake a combination of inside vs outside of IR35 contracts through the same limited company. You should remember that 91% of individual assessments undertaken here at Qdos via the Qdos Status Review service are outside IR35. Working under engagements that are outside of IR35 is by no means impossible,” said Qdos.

HMRC will focus on ensuring compliance with the new rules, rather than investigating past arrangements. It states on its website that it will not open a new compliance enquiry into a contractor’s return for tax years before 6 April 2021 in circumstances where:

  • a client decides that a contract is within the off-payroll working rules (IR35)
  • a contractor changes the way they work from providing and invoicing services through an intermediary entity to now being paid via a client or end user’s payroll
  • a contractor ends a contract because they disagree with a client decision on status
  • This includes any decisions that clients may have already made to prepare for the April 2020 changes, which have now been delayed

The only reason HMRC will open an enquiry using information acquired through the off-payroll working rules changes is if there is reason to suspect fraud or criminal behaviour.

If you have an ongoing compliance enquiry with HMRC, the tax office will not ask for any information on decisions that clients may have already made or were in the process of making for the April 2020 changes, (which have now been delayed), as evidence for those ongoing enquiries.

Contractors can take note:

  • HMRC took a similar approach to contractors in the public sector when the rules changed in 2017.
  • HMRC has never opened a compliance enquiry into a contractor’s compliance with the off-payroll working rules for tax years before 6 April 2017 using information acquired through the off-payroll working changes brought in by the 2017 reform.
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