Evidence closes an enquiry early

Qdos IR35 case study: Evidence closes enquiry early

In this enquiry, Qdos were called upon following a contractor receiving an IR35 enquiry letter from HMRC. Having sufficient evidence to provide HMRC with at the outset can often shut down an enquiry right away, as this case study demonstrates.

Read more IR35 case studies.

The case

Following HMRC's opening IR35 letter, the contractor was asked to undertake the Business Entity Tests (which have since been abolished due to their ineffectiveness - see more information below) for each of the four contracts that fell within the period of enquiry. The result of this was that the contractor only fell into the medium risk category.

The contractor had produced a list of factors that they felt placed their company's relevant engagements outside of IR35. After reviewing this, Qdos presented the contractor with a list of questions relating to various employment status factors.

Once the contractor had responded to the questions put forth, a nine page letter was compiled focusing on the main status factors for each contract that supported the opinion that the contracts were not caught by IR35. This was bolstered by references to relevant case law.

This evidence was sufficient to enable HMRC to agree with Qdos’ opinion at a very early stage of the enquiry, although the fact that the contractor had concurrent contracts was a significant advantage.

It was interesting to see that the client only fell into the ‘medium risk’ category in the Business Entity Test, reiterating the risk that contractors face when relying solely on this form of self-assessment and not taking out additional forms of protection.

Evidence

We recommend contractors compile as much evidence as is reasonably possible for each engagement. Doing so means that no matter how much time passes following the contract, you will have relevant information to provide in the event of an enquiry. Coupled with our expertise in applying IR35 case law and our experience with HMRC's status inspectors, enquiries can be short affairs.

• Contract review - a professional contract review of the written contract is the first port of call. HMRC will want to see the terms of the contract and then how they relate to your working practices.
• Working practices - a professional review of your working practices alongside the contract is recommended. This way the consultant can assess how well your day-to-day relationship mirrors the written terms, along with their strength in case law.
• Confirmation of arrangements - you could request that your end client signs a confirmation of your working practices which will provide written agreement from the person who you correspond with the most.
• Any other relevant evidence - such as proof of substitution, concurrent contracts, a list of key points about the engagement such as staff meetings you were not required to attend, times you were sent home early due to not work, etc.

Finally, Tax Enquiry insurance will provide you with peace of mind as well as expert representation in the event of an enquiry.

Business entity tests

At the time of this enquiry, HMRC had introduced a 12-part test called the Business Entity Tests (BETs). It consisted of 12 questions based around the IR35 status tests derived from case law.

The tests operated on a point-scoring basis and were intended as guidance for contractors. The points resulted in bands of risk (low to high) although the majority of contractors ended up in the medium-high category due to the nature of the questions.

In addition to offering contractors guidance, HMRC provided a guarantee in that those who received a low risk result and could provide satisfactory evidence of such, would be given a three year safety period where they would not be investigated.

However, within three years of their introduction in 2012, HMRC decided to remove the tests. This was largely based on HMRC's view that the tests were misused by contractors who were, of course, using the guidance to self-assess and determine their IR35 status. The tests were also widely criticised as being unhelpful with the majority of genuine contractors finding themselves in the higher risk bands.

Arguably, the more recent Check Employment Status for Tax (CEST) tool which HMRC released for the public sector reform in 2017, is simply an advanced version of the Business Entity Tests, applying a checklist approach to IR35 which has long been criticised not only by tax professionals like ourselves, but by the courts in IR35 tribunal cases.