Contractors' Questions: Would extending be an IR35 red flag to HMRC?

Contractor’s Question: I have a limited company and currently contract via a recruitment agency to a single organisation. I have been working at this same organisation since September 2013, but did have a six-month break last year.

The organisation would like to extend my contract on a rolling one-month basis through to June 2016. Do you envisage me hitting any issues with HMRC should their IR35 team scrutinise my engagement?

Expert’s Answer: Firstly, I would draw your attention to the 24-month rule for expenses in a temporary workplace. Broadly, if you have spent and are likely to spend 40% or more of your working time at a single site for your single engagement, HMRC could argue that your travel between the single company site and your home is ordinary commuting and not available for tax relief.

Other than that, it is the strength of the contract which is important, coupled with the day-to-day reality of your working arrangements.

Whilst the length of an engagement is not one of the tests considered as part of an IR35 enquiry, at Abbey Tax we find that HMRC’s view is distorted by a longer engagement with one client. This can falsely encourage HMRC to continue a status enquiry, rather than maintaining focus on the contract and the day-to-day reality.

For example, a contractor may only have one end-client but could be undertaking a number of sequential different engagements for different areas of the business which, to all intents and purposes, are for different clients. HMRC will often overlook this type of scenario. It is important to maintain evidence of the work being done so that HMRC can be assured that it is not a single engagement, but perhaps a number of shorter engagements within a defined project(s). It is certainly advisable to ensure that each new project or defined piece of work is accompanied by a schedule setting out the deliverables along with any contract extension.

Concurrent contracts with different end-clients can also be helpful in promoting the argument that you are in business on your own account.

The expert was Guy Smith, tax investigations manager at IR35 specialists Abbey Tax.