HMRC start their IR35 investigation

Keep calm pictureHMRC launched an IR35 enquiry via their standard ‘Check of Employer Records’ Letter into a locum optometrist, whose company was engaged concurrently by five end clients. Whilst there were strong business factors, in addition to providing optometrist services for a number of clients, the client also sold optical equipment and sunglasses, one of the engagements in particular had poor contract wording; specifically it referred to the client personally throughout the contract rather than his company.

The case was picked up by an IR35 specialist and it was made clear to the optometrist client that this case would not necessarily be straightforward.

In response to HMRC’s first letter, the IR35 specialist highlighted the business factors indicating that the status challenge was without grounds.  HMRC’s response was just to ignore the non-consultancy work and simply state that this element of the client’s business would not form part of their enquiry. The point was also made that the client had provided a substitute in the past, albeit outside of the enquiry period under consideration.

The HMRC Inspector ignored this too and used that as an excuse to extend the enquiry period, something which was fiercely rejected.

Lost in the post?

Events then took an unfortunate turn when a letter issued by HMRC in early August did not arrive until mid-September, outside of the 30 day period in which the Inspector had requested a response. Despite immediately contacting HMRC on day of receipt, HMRC’s response was almost disinterest and an extension of three weeks was granted (i.e. less than the 30 days of the original offer period). It also came with a Sch36 Notice warning of penalties if no response was forthcoming. Clearly, managing the client relationship is part of any good consultant’s skill-set, but the Ir35 specialist’s task was not made any easier when an unfortunate circumstance was exacerbated by HMRC’s intransigence.

the IR35 specialist complained to HMRC’s Local Compliance Quality Assurance unit which managed to find a first class stamp and acknowledge the complaint within 48 hours but their response, a fortnight later, was that there was nothing that could have been done differently. Thereafter, everything was sent recorded delivery.

HMRC issued the client with questionnaires extending to some 70 questions for each of the five end client relationships.  These were duly completed.

HMRC’s “divide and conquer” approach to IR35 investigation

HMRC then wanted to go to each of the end clients to corroborate the position. The IR35 specialist was able to work matters into the optometrist’s favour in that all the end clients were provided with a copy of the optometrists responses in respect of the business practices so that they could be consistent in their responses to HMRC.

These responses formed the basis of each of the end client’s responses, with each the end client being happy to confirm the optometrist’s understanding was correct.  This saved each end client having to ‘reinvent the wheel’ and involve the optometrist in meetings and/or correspondence with HMRC which could potentially have involved misinterpretation or misunderstanding.

This still left the matter of the engagement where the optometrist was named personally. Fortunately, the optometrist’s client had offered the optometrist work which he was happy to accept on the basis that a substitute could be provided. The client was happy for the optometrist to substitute and although this substitution occurred outside of the enquiry period, it helped to persuade HMRC that in fact, overall, this was not a case that they should continue with. HMRC conceded that, whilst they did not believe the case was without doubt, they would not pursue the matter further.

The Optometrist was, needless to say, delighted with the outcome and praised the IR35 specialist’s tenacity and persistence on his behalf.

Lessons to learn in defending against an IR35 investigation

  • HMRC’s inspector approach was harsh, unresponsive and unreasonable
  • The IR35 specialist and taxpayer need to focus on the big picture and the end game
  • The defence must be tenacious and persistent and argued using a combination of facts and case law
  • Turn diversity to advantage: the IR35 specialist was convinced that the complaint against their behaviour undermined HMRC’s resolve
  • Using HMRC’s questionnaire to influence the taxpayer’s end clients’ thinking and managing their responses minimised confusion and stopped HMRC’s tactics of “divide and conquer”
  • Use an IR35 specialist.  DO NOT try and defend yourself

HMRC IR35 Investigation protection

The IR35 specialist in the above case spent in excess of 70 hours on the case potentially costing the taxpayer £15,000 in fees.   These costs are not normally covered by accountants’ monthly fees and so buying Investigation protection could save you thousands of pounds and a lot of anxiety.  The case study above was defended by an Abbey Tax IR35 specialist.  Abbey Tax provide the support for clients who are covered by PDS Accountancy’s HMRC investigation service.  Abbey tax has dealt with some 20% of HMRC’s IR35 cases in 2012/13; either providing advice or in the majority of these cases, working the enquiry – as at the end of May 2014 with 100% success.

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