HMRC reported that the tax yield from 23 IR35 enquiries in 10-11 tax year was £219,180. Some might therefore find it surprising that HMRC is reported to have set up 3 teams of 12 people to deal with the enforcement of IR35 since on the face of it the yield would not even pay their wages. HMRC must therefore be confident that the new "Business Entity Tests" will help to deliver results. The purpose of the tests is to determine whether a contractor is high, medium or low risk from an IR35 perspective before beginning an enquiry.
HMRC wrote to a number of contractors last week asking whether they have considered their IR35 status and if so, if they are working outside IR35. A number of examples were included with the letter to help the contractor gauge his status.
What do the letters say?
The letters contain a number of questions about the contractor's circumstances with points for yes answers. The contractor simply adds up the points and gets a high, medium or low risk profile. The catch is that most contractors will be high risk even if they fall outside IR35.
What should you do if you receive a letter?
The realistic options are:
- Do nothing - you don't have to reply to the letter but run the risk of an enquiry being opened.
- Confirm you are low risk - HMRC will ask for evidence as to how you have reached the conclusion. Business plans, business lease agreements, unpaid invoices are the sort of things HMRC is looking for at this stage.
- Confirm you are medium/high risk under the tests but are outside IR35 - An IR35 review from a reputable organisation like PayStream should satisfy HMRC which will most likely close its file for the forseeable future. Please note many IR35 reviews will point out strengths and weaknesses so think carefully before sending on the review.
Ultimately it's safest to speak to your accountant or an IR35 expert like PayStream.
If you have a received a letter or receive letter in the future and would like guidance and assistance, please contact the Compliance Team on 0161 929 6000 or email firstname.lastname@example.org. Likewise, if you would like to discuss the amended IR35 regime or the content of this article further, please contact us on the same details.