Contractors' Questions: What to consider with an IR35 confirmatory letter?

Contractor’s Question: Except for this advice which was given before Confirmation of Arrangements were said by some to have lost their clout, are there any tips when drawing up a CoA document?

Expert’s Answer: The key aspect is that the document must be presented as valid evidence and skill is needed in preparing the statement. After all, it is intended to provide compelling evidence of the real working practices in a manner which satisfies HMRC's obligation to establish the true facts of the engagement under review and, if necessary, to provide a basis of testimony for both the contractor and end-client in the event of an appeal.

Counsel for the contractor must also have confidence that the Statement of Working Practices (often referred to as CoA) is professionally presented and covers all necessary information, notably the usual areas of IR35 including mutuality of obligations, control and substitution.

Preparation of a witness statement is a more involved process than a form featuring 20 tick-box questions (which some CoA templates take the form of), and involves explaining to both the contractor and end-client that the statement is a legal document and will be supported by a statement of truth in the same manner as a witness statement in civil litigation.

This level of formality adds weight in dealing with HMRC and strongly drafted statements usually help expedite an IR35 inquiry provided, of course, that the facts support self-employment. Conversely, relying on a ‘stock’ CoA statement is not a guaranteed method of ending an IR35 enquiry quickly. Nor does it always help to minimise a contractor’s fees or stress levels. 

Furthermore, the new anti-avoidance measures introduced in the 2014 Budget (amending section 44 (5) (b) Income Tax (Earnings and Pensions) Act 2003) have made end-clients slightly more cautious about signing Statements of Working Practices/CoA, where an IR35 enquiry has started in respect of an ongoing engagement. However, this should not be a cause of undue concern where a contractor is clearly self-employed and does not hold a job title with the end-client.

In summary, the key point for you to remember when drawing up your Statement of Working Practice is that HMRC needs to be made aware that the statement is properly drafted as a witness statement, which can stand up to examination in a tribunal. A generic CoA letter won't achieve this in my experience. I've seen such CoA letters and would not be surprised if HMRC does not attach much weight to them.

The expert was Martyn Valentine, director of IR35 advisory The Law Place.