HMRC IR35 Investigations using Section 36 - cause for alarm ?
Dave Chaplin at Contractor Calculator features an article on the HMRC new powers of investigation under Section 36.
Based on an interview with Matt Boddington at Accountax,the article points out that under these powers HMRC can obtain evidencefrom a Contractor's end client and does not have to advise thecontractor of what the end client has said, unless the case goes beforea Tribunal.
Dave concludes that these powers put HMRC in a very strong positionand that it is wise for contractors to protect themselves withinsurance policies to protect against HMRC action.
We would certainly agree with all the commenst made by both DaveChaplin and Matt Boddington, and think that it is important to add acouple of extra points.
Firstly - There is a bit of an "alarmist" theme in the article,after all thats what news is about ! We agree entirely that contractorsneed to know about them, but any professional Contractor or Freelancerwho has either confidently assessed their own IR35 position ( by propermethods though, not just a vague hope !) or had their contractsassessed by a professional, does not need to worry any more aboutSection 36, as long as the contractor has obtained the necessarydocumentation and kept all the evidence that supports their IR35status, at the end of the day Section 36 just means you need to beprepared. These powers do not change your actual working arrangementsor the contractual terms on which you have been engaged.
Secondly - In the case of a Tribunal all evidence from both sides isseen by both sides, so nothing is hidden. If Contractors either usetheir membership of the PCG or use an accountant that provides TaxInvestigation Service through an Insurance Policy ( Plug: We Do !) thenthey need have no extra fear of having to go to a Tribunal. Defendingyour IR35 status is about preparation long before an investigation everis considered by HMRC, as long as you have a defensible position.
Having said that we have reproduced this paragraph from MattBoddington word for word, we believe that all professional Contractorsand Freelancers should read his words carefully:-
“A successful IR35 defence is not about winning; it’sabout avoiding a case in the first place,” explains Boddington. “HMRChave given themselves a whole new array of powers and penalties, whichthey are itching to try out on taxpayers they have targeted for maximum‘yield’ and it is no secret that HMRC are hostile to the contractingsector.”
From this we would conclude
- IR35 investigations are, as many have pointed out, going to be on the increase
- Be prepared, confidently know your IR35 status
- HMRC already has the information to target high yielding cases ( From P35 and the Self Assessment Tax Return)
- Your defence of your IR35 status is down to you collecting all the required information whilst on your contract
- Your maintenance of your IR35 position will also be dependent onyour behavious/actions whilst on contract, and the evidence kept ofthose actions.
- Make sure your advisers are very up to date with IR35
- Protect yourself using appropriate insurances
- Take advice, be correctly informed, be objective, be prepared
For further information you may want to read or guidance on IR35 and also look at our series of IR35 videos , in particular the final video IR35- How To Manage Your Proof and evidence.