IR35: Are HMRC priming contractors for what's to come?

We have recently seen a number of letters from HMRC received by contractors working for a well-known end client in the engineering and construction industry.

The letters ask the contractor to check their employment status whilst they carried out work for this particular client. The implication from the letters is that HMRC have their doubts that contractors are or were outside IR35 whilst working on this contract.

Anyone receiving a similar type of letter should be reassured that they are not obliged to comply with it, even though it mentions a possible future compliance check and interest or penalties being charged on any unpaid tax if you’ve got your status wrong.

This is not the first time that HMRC have carried out a focused status campaign based around a multinational business in this sector. Their rationale is often to select a small number of contractors working for such a client for compliance checks. If those checks indicate that the contractors’ employment status is within IR35, they will use the client’s records to contact other similar contractors and ask them to check their status too.

Such letters suggest that the contractor should use the HMRC Check Employment Status for Tax (CEST) tool. They go on to explain what the contractor needs to do if the output indicates that he/she is really an employee (paying over any PAYE/NICs) or to keep a copy of the CEST report showing that they are a bona fide contractor outside IR35.

If you are in any doubt as to your employment status then don’t hesitate to ask your Accountant or tax advisor for a status review and to draft an appropriate response to HMRC.