Some of you may have noticed a recent trend in IR35 enquiry selection – public sector workers.
Certainly, over recent months, a good number of new IR35 enquiries involve those contractors providing their services to governmental departments. Is it a coincidence that last year’s review of public sector appointments and all the hysteria that surrounded the issue has resulted in more IR35 compliance checks in this area? HMRC are at pains to point out that it has always carried out compliance reviews in the public sector and do not want people to think that the 2012 review has resulted in them for the first time considering the IR35 risk in this area.
It is true that HMRC have historically conducted IR35 enquiries where the end client has been a public body but the political and media fed hysteria that led to last year’s attack on contracting in the public sector together with so much intelligence readily available to HMRC has sharpened the Revenue's focus in this area.
Back in May 2012 when the new approach to IR35 administration was heralded we were told that the first crop of enquiries were to be concentrated on those considered to be high risk. Whilst we were given some signposts as to what constituted 'high risk' the exact criteria was and is not known. The fog however is slowly lifting as it is becoming clear that contractors plying their trade in the realm of the public sector are vulnerable to being selected for an IR35 audience with HMRC. Even more so if they are high earners as they will be particularly attractive to HMRC because the potential tax and NIC yield is so much greater of course.
Many of those unfortunate freelancers that are currently undergoing enquiry and whom the writer has come into contact with, do not have the protection of tax enquiry insurance (TEI). As such their vulnerability is enhanced because, as accountants and advisers, you know that professional costs play a significant role in a taxpayer’s decision as to whether or not to continue battling with HMRC, particularly when an enquiry has been running for a lengthy period. TEI or tax loss insurance removes that barrier to a contractor's decision making and allows them the freedom to pursue the fight with the Revenue for as long as it takes.
Despite HMRC's assurances that they will close down any enquiry at the earliest stage where there is compelling evidence to do so, this does not always appear to be the case for those contracting to public bodies. In some cases the Revenue are reverting to type by insisting in approaching the relevant governmental department despite the evidence laid before them. In these cases typical enquiry time could be up to 20 hours from start to finish, possibly more depending on the quality of your client's and the end client's evidence.
For those contractors who are unprotected their defence fees will have to be met by their companies. To compound the misery further such costs are not deductible for corporation tax purposes. Only if an enquiry relates specifically to the trading income and as a result of the enquiry no additional profits are brought within the charge to tax, can any costs incurred in dealing with that enquiry be allowed for tax purposes. An IR35 enquiry falls within the ambit of PAYE and is therefore not a corporation tax enquiry.
Whilst the cost of TEI or tax loss insurance may also fail to be an allowable tax deduction at least the contractor's PSC is not out of pocket in the event of an enquiry.
HMRC has confirmed that it is on course to hit 230 IR35 enquiries by March of this year which the department had previously committed to publicly. That figure is set to double in the coming financial year so this current trend may be the tip of the iceberg.
The time for your clients to act is now as they could be next in line of HMRC's fire. For the sake of just over a hundred pounds for TEI or several hundred pounds for tax loss insurance per annum, your freelance clients could save themselves thousands of pounds and a lot of sleepless nights and heartache.
Ask away! One of our team will get back to you!