Employing just the right level of menace against GSK contractors is the taxman’s new IR35 trick

A bank holiday weekend to remember for all the wrong reasons is the shared experience of some 1,500 contractors at GlaxoSmithKline because, just before it, they received HMRC’s blanket decision that each and every one of them is apparently inside IR35, writes Graham Webber, tax director at WTT Consulting.

Quite apart from the unpalatable fact that HMRC’s assessment is based on information apparently held but not divulged, this weekend from hell was always in the calendar. To some, it might be a surprise for coming so close to the rollout of a new operation for the Intermediaries legislation.

HMRC’s hunger for more low hanging fruit

However, the professional adviser community has been expecting this move from an insatiable HMRC for quite some time. The limited company contractors at large companies like GSK are ‘low hanging fruit’ in HMRC’s eyes. That’s why we will see this campaign extended very soon.

Indeed, we suspect that the only reason that this approach by HMRC to such a sizeable contingent of contractors has not happened before now is lack of resource at HMRC. (Note -- the letters GSK contractors have received come from the “Wealthy/Midsized Business” unit, rather than Counter Avoidance). That same lack of resource and perhaps lack of knowledge, seems to have persuaded HMRC that each and every one of the 1,500 recipients of their letters are operating outside IR35, inappropriately.

So a blanket appraisal has been adopted, seemingly ignoring individual circumstances and the fact that all large companies, especially those in tightly regulated industries like Pharmaceuticals, have complex internal structures and policies around recruitment and retention of key staff. This owes more to a policy decision being taken at HMRC and applied indiscriminately across GSK for now -- and no doubt many more companies over the coming months.

Striking the balance between menace and MP face-saving

The letter is, in our view, very carefully crafted with just the right level of menace to amount to coercive pressure on taxpayers, without having the capacity to embarrass any MP who may have to defend such tactics. That does not excuse this letter being presented to taxpayers in a manner that suggests a response is a ‘must,’ and that penalties can apply if no response (or better still, agreement) is forthcoming.

Many of the claims in the letter are flimsy (HMRC has evidence but declines to share it), or just plain wrong (threatening a penalty for failing to respond to a non-statutory request?). But nonetheless, your response as a contractor in receipt of it needs to be handled with care.

How to respond to HMRC’s new IR35 letter

If you have insurance for IR35, contact your insurer as soon as possible. If you have an adviser, contact them as soon as possible. If you have neither, find an adviser. But note, I suspect that trying to insure post-receipt of the HMRC letter is not possible.

From what we can see beyond those options, while you are not obliged to respond to the HMRC letter, we believe it is sensible to do so, even if it is only that you ask HMRC for an extension to the Thursday September 19th deadline.

Questions, and answers?

Of the end-user, and in the event that I was advising the company, I would be asking a question or two of my own. Chief among them would be why such a large and no doubt important part of the workforce has received such letters. In addition, what action did the agency/intermediary take (or not take) that has led to this situation? And potentially before those two questions, were GSK and/or the intermediate agencies fully aware of the HMRC campaign?

At the time of writing, we simply don’t know the answers to these questions although somewhat reassuringly, ContractorUK has informed me that queries it has posed to GSK are due for a response from the pharmaceuticals giant today. So potentially, the recovery from the long weekend many will now want to forget could begin as early as this afternoon. But almost regardless of what the company comes out and says publicly, it must be hoped that GSK and the intermediaries will both be able -- and willing -- to help provide the evidence to prove or disprove HMRC’s so far unsubstantiated claims.