HMRC are able to apply significant penalties, up to 100% of the assessed tax due, in the event that a contractor is unable to demonstrate that reasonable care has been taken in assessing their IR35 Status.
It is essential that contractors have a full professional contract review, including a review of working arrangements, to be in a position to demonstrate that reasonable care has been taken and therefore avoid these penalties.
Any review needs to be supported by a document outlining why the conclusions were reached. This will provide your evidence that you have taken reasonable care.
HMRC from April 2009, covering returns from 2008, are able to apply significant penalties where a contractor is unable to demonstrate that reasonable care has been taken in assessing their IR35 status.
What constitutes reasonable care has not been defined although, based on case histories, most experts agree that there are three parts:
1. Assessment of the contract between contractor and agency
2. Assessment of the actual working arrangements associated to the assignment
3. A written report detailing why the conclusions were reached.
Without all three HMRC are likely to try and apply penalties. These penalties can be up to 100% of the additional tax assessed.
Whilst we accept that a strongly worded contract could prevent a status enquiry from being opened in the first place, the strongest position to prevent an IR35 status enquiry is to have the contract supported by a confirmation of working arrangements, preferably signed by the end client. These should be reviewed and supported by a conclusions document from the professional firm.
HMRC, when examining the actual working arrangements, looks to construct a notional contract between the contractor and their end client and ignore all other parties in the chain. There has been an increased emphasis by HMRC on this aspect for sometime.
This close examination will often include detailed statements obtained from the end clients particularly in relation to right of substitution, supervision, direction and control.
There is limited benefit in having an agency construct a contract that, on its own, looks outside IR35 but in no way reflects the actual working arrangements. Time is better spent ensuring the contract reflects the arrangements and supported by a signed document from the client.
Not confirming the actual working arrangements at outset can leave contractors open for challenge at a later date.
Status enquiries can be opened on contracts from six years ago and it must be remembered that in some cases the individual at the end client who dealt with the contractor may no longer be there. Where this is the case a generic response could be issued to HMRC detailing current contracting practices at the end client which could be very different from the time under review. These generic statements are difficult to defend without reference to a document dating to the time in question.
Many accountancy providers offer assessments of your IR35 status as part of their package. Where this is offered you should obtain, in writing, confirmation that their review meets the requirements for reasonable care. Whilst this does not guarantee that your IR35 status as correct, no one can guarantee that, it does ensure that if you were successfully challenged by HMRC penalties should not be applied. If you find that HMRC do apply penalties under the reasonable care route this written confirmation provides you with a claim against the provider.
If your accountancy service provider is unable to confirm this you must ensure you obtain a full professional review with supporting documents.
It should also be noted that whilst accountancy service providers can review and give opinions on the IR35 status of contracts they should never negotiate any changes. Negotiating contract changes could leave you liable to the MSC legislation and the risk of debt transfer.
In summary our advice to contractors is to still follow the basic principles for demonstrating that you are in business in your own right and ensuring your contract accurately reflects your actual working arrangements. Contractors who consider themselves outside IR35 should look to have their working arrangements signed by their end client and hold a copy of the document with the contract.
We believe that a correctly worded contract, supported by a signed working arrangements document and a confirmation of status from a professional review firm significantly reduces the likelihood of an enquiry ever being opened.
As a minimum contractors should ensure that all contracts, extensions and renewals are supported by a professional status review to demonstrate reasonable care and prevent HMRC from imposing penalties.
Kate Cottrell of Bauer & Cottrell added:
It is absolutely vital to review the working practices and the written contract as the entire IR35 status argument depends on what happens on the ground. The very least contractors should be doing now is having their contracts and working practices reviewed in order to satisfy HMRC that they have taken reasonable care to avoid penalties from April 2009 under the new HMRC penalty provisions.
You can access full details of our members assignment confirmation service here.