Doubts raised over IR35 confirmatory letters

The effectiveness of Confirmation of Arrangements (CoA) to help contractors demonstrate an outside IR35 position has been thrown into doubt by a leading status expert.

Andy Vessey, senior employment consultant at Qdos Consulting, told ContractorUK that CoA documents are “no longer being accepted” by the taxman as an indicator of IR35 status.

Evidencing his claim, which HMRC disputes, Mr Vessey said that out of a dozen IR35 cases that he is defending contractors in, signed CoA have been disregarded by tax officials in 75% of them.

Confirmation of Arrangements, also known as Confirmatory Letters or Statement of Working Practices, spell out a contractor’s working practices with a client by making reference to key areas of employment status.

They do not alter a contractor’s IR35 position, but have long been regarded as 'very helpful for their potential to stop HMRC having recourse to meet the client' or, more realistically, for narrowing that recourse.  

“The CoA used to be generally well-received by HM Revenue & Customs,” says Mr Vessey, a former Revenue official. “It wasn't always taken at face value and nor did I expect it to be…

“[But it did] narrow down the Revenue's questioning so that the enquiry could focus on a few important points. This would, in turn, help expedite the enquiry more quickly.”

He described what he called the recent “change in HMRC’s attitude” towards CoA (which are often in the shape of letters, as both client and contractor sign it) as “concerted,” before recalling:

“[One contractor] was asked to get it completed and signed off in the normal manner, which he did do, but it took a few months because the client was based in another EU country.

“By the time it was sent back [completed] to HMRC, the compliance officer told me it was no longer HMRC policy to accept CoA. Basically; HMRC shifted the goalposts overnight.”

The Revenue denies the charge. “There has been no change as to how we conduct IR35 enquiries. We use Confirmation of Arrangements in the same way as we have always done,” a spokeswoman for HMRC told ContractorUK.

She added:“We consider them carefully and look at a range of evidence. In an enquiry, HMRC will often still need to talk to a client and we've been very clear about this.”

Despite the denial, another status firm signalled that HMRC has told it in writing that “the CoA document does not replace the necessary fact finding” required of its IR35 inspectors.

However this wording, seemingly issued to two status firms whose CoA submissions on behalf of contractors were disregarded, is news to other IR35 advisories.

Abbey Tax says HMRC is taking the “same steps” as usual in an IR35 enquiry; The Law Place says it has not seen a “reduction in the clout” of CoA, and Bauer & Cottrell says tax officials ‘still check the facts for themselves first.’

Tax consultant Neeta Vaitha of Wolters Kluwer is also part of that consensus. “A confirmatory letter does not replace a contract and will be interrogated in the same way”, she warns.

“[It] affirms the conditions under which services were performed, demonstrating what the intentions of both parties were…[but] it will not deter HMRC from carrying out [its own] fact finding.”

Yet also in the tax consultant’s experience, CoA have deterred HMRC from asserting that the worker’s formal contractual terms do not match the actual working arrangements (known as the ‘sham’ argument).

Vaitha is not alone in suggesting that regardless of whether HMRC’s policy on CoA has changed, the CoA as a weapon to defend a contractor’s self-employed status has value.

“A CoA letter, by itself, has never been some kind of magic bullet,” acknowledges Bauer & Cottrell. “However they are very useful to contractors, as a matter of due diligence whether under IR35 investigation or not.”

The Law Place’s Martyn Valentine also sees value in CoA. “In my experience” he caveated, “HMRC will respond positively when presented with compelling evidence of the actual working practices, covering the usual areas of mutuality of obligations, control and substitution.”

But based on what another IR35 advisory is currently seeing, even these key status areas cannot be individually relied upon to stop the Revenue in its tracks. 

“One of my team has a case where the client has a substitution clause in the contract and has activated the clause and used a substitute,” reflected Guy Smith, who manages investigations at Abbey Tax.

“However, HMRC are still attempting to go through the [normal IR35 enquiry] process…so if they put so little store in one of the fundamental areas of IR35, it is hardly surprising that CoA letters carry little weight.”

Mr Smith’s assertion that CoA now carry “little weight” implies the Revenue’s stance on such documents has indeed toughened, as in July 2014 his firm said CoA were “useful.”

The firm explained at the time: “Demonstrating that both parties are ‘singing from the same hymn sheet’…leaves HMRC less room to develop its arguments. Certainly this has proved successful in the past.”

Valuable to contractors or not, what Qdos insists is HMRC’s “rejection” of CoA seems to go against what the tax authority declared in May 2012, as part of a package to improve IR35’s administration.

At the time, HMRC said that as long as “satisfactory” evidence could be put forward to prove a contract was outside of IR35, then it would promise to close down the enquiry at the earliest opportunity and not reinvestigate for three years.

“Of course, what the Revenue did not do is provide us with a definition or examples of ‘satisfactory,’” pointed out Mr Vessey. “I’ve challenged the department over this.”  

Editor’s Note: Related Reading –

Contractors begin new IR35 assurance process

Contractors’ Questions: What now that HMRC says I’m inside IR35?

One clause, even a bunch, won’t save contractors from IR35