IR35 legislation can be incredibly complex. That’s why here at Brookson Legal Services we feel that nobody should have to tackle HMRC on their own when faced with an enquiry into their company’s affairs. Coupled with the experience and knowledge of the Brookson tax advisors, we can offer advice and support to Limited Company Contractors throughout the challenging IR35 compliance check process.
One stand-out success story which demonstrates our knowledge and credibility in defending client’s from a HMRC IR35 enquiry comes from 2018:
Imagine having been engaged via your own Personal Service Company (PSC) with your client for over twelve years, mainly working from the end-client’s premises and taxing the income as self-employed, only to have the HMRC notify you that they are investigating whether your business has been paying the correct levels of tax and National Insurance Contributions (NICs).
Worrying, right? Both the prospect and the reality of being subject to an HMRC investigation are alarming, no matter how many steps you take to appropriately manage your business compliantly, however in this case the stakes were particularly high in that the 12-year assignment would bare significant outstanding PAYE tax liability plus interest and penalties.
On the back of a letter received by HMRC, Brookson Legal Services were instructed to advise our client and assist in formulating responses to HMRC’s enquiries. As the client in question was an Accountancy Customer of Brookson One, there was no charge for Brookson Legal Service’s assistance.
Firstly, we had in-depth discussions with the client in order to understand how the PSC operates as a company and the circumstances relating to the assignment in which the enquiry period covered. Having this knowledge allowed us to position our client and set expectations in relation to areas that the HMRC would likely want to explore.
From the off it seemed that the odds were stacked against this client. It is key that any deadlines set by the HMRC are acknowledged in order to avoid the risk of higher penalties being added on to any liabilities that may be deemed to fall due. The initial notification of this HMRC compliance check had gone unnoticed for 3 weeks, meaning that we had to apply for multiple extensions on behalf of our client in order to sufficiently formulate a response to HMRC. Additionally, it seemed that the lengthy engagement of over 12 years had brought with it indicators of employment that could potentially be difficult to overcome.
As is usual HMRC requested the contractual documents for the assignment first of all. We were able to prepare these for the client, submitting them clearly in chronological order drawing attention to the key clauses supporting our client’s independent status. Following this, HMRC submitted to our client a list of 46 questions relating to their day-to-day working practices. Understandably this was quite daunting for our client and to a layperson, some of HMRC’s questions appeared to be similar and ask the same thing on more than one occasion.
As experts in this field, we were able to break the questions down and explain the subtle differences. This allowed us to formulate responses which not only answered the relevant question, but also contained further information supporting that the PSC was operating outside of IR35.
Upon our advice, our client contacted their end-client to seek confirmation that the right of substitution, held within the contract for services, was valid and would not be unreasonably withheld in practice. In the twelve plus years in which it provided the services, our client had never provided a substitute in practice, and so we advised that HMRC would want to see evidence that a personal service was not required by the end-client and he did have a valid right to provide a substitute.
One of the main hurdles to overcome in this enquiry was the length of our client’s assignment; although length alone is not enough to cause an assignment to fall within IR35 it often brings with it employment-like traits and we were aware that it was stated by the tax tribunal in Battersby v Campbell (HMIT) (2001) Sp C 287 that a relationship had an element of permanency as it lasted for seven years. Therefore, we attempted to justify why the engagement had continued for some period in that our client was engaged to work on a major offshore project which consisted of numerous phases including engineering, procurement, installation, commissioning and operations phases. In addition, we gained an understanding from our client that the market in which the PSC operated is volatile. This, coupled with the fact that the specific project contained multiple phases allowed us to put forward to HMRC that engaging on this contract was a commercial decision for our client’s business, providing a strong opportunity to generate income within an unstable sector.
To the satisfaction and relief of our client, a number of weeks after submitting a response to HMRC’s questions, we received a letter from HMRC stating ‘… I am satisfied that the contract falls outside of IR35 and the compliance review is now concluded’.