HMRC ‘used tax probe as Trojan Horse for IR35 enquiry’

The taxman appears to have used a corporation tax probe of a limited company contractor as a Trojan Horse to get into the business and investigate its contracts under IR35.

Although the company has asked not to be named, its IR35 adviser has disclosed that HMRC’s scrutiny of the dual-director business started on a matter “unrelated” to status.

“The company…was initially notified of a corporation tax enquiry”, said the adviser Qdos Contractor. “[But despite how it] started…eventually [HMRC] focussed on IR35.”

The short time frame between the CT enquiry – in 2017 -- and the IR35 investigation, which began in the first month of 2018, is raising questions for the advisory’s CEO Seb Maley.

In fact, he spoke of now being “left to wonder" how and why "HMRC jumped from a corporation tax enquiry to an IR35 enquiry.”

“It could be coincidence,” he acknowledged, despite describing the two contracts that HMRC investigated under IR35 as “recent” in the company’s history.

“But it does make you question whether this is a deliberate move and if there is information-sharing between departments.”

If there was such ‘information-sharing,’ the sharing parties may no longer be on the best of terms, as the IR35 enquiry – which threatened a £100,000 tax bill, collapsed after about 12 months,

On both the contracts which HMRC probed (one was provided directly; the other through an agency), the right of substitution was not only present, it was also “exercised in reality.”

“It is of real concern that despite substitution having been exercised multiple times,” Qdos said “and HMRC being aware of that at the outset -- it took so long for them to accept that IR35 didn’t apply.

“This is the second IR35 case…[we have] successfully defended already this year, which is reflective of HMRC’s desire to attack contracts that on closer inspection clearly belong outside the rules.”

In line with the 'genuinely self-employed' outcome that HMRC finally reached, the two contractors did not work under the ‘Control’ of their clients, as the clients confirmed.

“After more than 12 months of correspondence, …[we were] notified by HMRC earlier this week that the IR35 enquiry was closed,” Mr Maley said on Wednesday. “HMRC did not specifically disclose why they closed the enquiry.”