Qdos shuts down three-year-long £100,000 IR35 investigation

Nigel Nordone, Head of Tax at Qdos, explains the role Qdos played in protecting one contractor from HMRC

With IR35 introduced in 2000 – and the rules reformed in the public sector in 2017 and private sector in 2021 – you’d be forgiven for thinking that, by now, HMRC has a firm handle on how the IR35 rules work. 

Unfortunately, that’s not quite the case, as Qdos discovered in one recent investigation involving a contractor client of ours. We successfully defended the three-year-long case, which carried well over £100,000 in tax liability and included HMRC ignoring a determination made by its very own IR35 tool (CEST). 

Over the years, HMRC has regularly been criticised for its aggressive treatment of contractors. This case was no different and, as our own CEO Seb Maley explained, represented “everything wrong with HMRC’s approach to IR35”.

 

Here are the key facts of what proved to be an ultimately fruitless IR35 investigation for HMRC:

In November 2019, HMRC contacted the contractor in question regarding their IR35 compliance. The tax office scrutinised two contracts, spanning four tax years, both held in the private sector. 

Alleging that the contractor belonged inside the clutches of IR35 on these engagements, HMRC pursued this innocent individual for £100,000, which consisted of income tax and national insurance contributions. 

During the investigation period, the tax office twice disregarded important pieces of information:

• First, the contractor had exercised their right of substitution; one of the IR35 key tests that suggested the worker was compliantly operating outside of IR35. 

• Remarkably, the determination made by HMRC’s very own Check Employment Status for Tax (CEST) tool – which deemed the contracts in question outside of IR35 – was overlooked. 

Ignoring both of these factors meant HMRC felt justified in dragging out the investigation, no matter the impact on the contractor. Then again, with the investigation overseen by six different tax officers, maybe we shouldn’t be surprised.

What does this mean for contractors?

HMRC’s inability to correctly interpret its own rules during this investigation – alongside the chaotic and disorganised nature of the enquiry – was a source of extreme frustration for us and our client. So much so that we filed two official complaints during the investigation in relation to how it was handled.

However, the fact of the matter is that HMRC is still able to investigate contractors who completed contracts prior to the roll-out of the off-payroll rules, in 2017 in the public sector and 2021 in the private sector.  

As HMRC steps up its investigations and enforcement activity, ensuring that you’re protected in the event of an investigation has never been more important; that’s especially true considering the sums involved in this case alone.

An insurance policy that covers your legal costs and potential tax liabilities, along with interest and possible penalties, remains essential in this climate.

Why not take a look at our range of IR35 and tax investigation cover or get in contact with a member of our expert team today to discuss your options.