Is HMRC’s offer to pause ongoing IR35 investigations an olive branch or red herring?

After a brief pause in tax compliance activity due to the coronavirus pandemic, HMRC has restarted ongoing IR35 investigations, writes Nigel Nordone, head of tax at Qdos Contractor.

Are you ready?

And while I doubt there will be much, if any, let up in the aggressive pursuit of contractors in the long run, for the time being, communications sent by the tax office point towards a reasonable approach. On the face of it anyway.

In letters received by several contractors who Qdos is advising and representing, HMRC seems sensitive towards the financial crisis caused by covid-19, and is asking if these individuals are “ready” to resume the ongoing IR35 investigation.

Unprecedented

Unheard of? Certainly in my experience, which includes seven years working as a tax inspector at HMRC. However, these are unprecedented times after all, and contractors -- as one person companies -- are feeling the brunt of the UK’s pandemic-inspired economic woes more than most.

But while HMRC putting this question to contractors is certainly the right thing to do given the current circumstances, the devil is often in the detail. And never more so than with tax.

Saying ‘no,’ and the response we got

So upon what grounds can a contractor take HMRC up on the offer to halt their IR35 investigation for the foreseeable future? In other words, when can you say ‘no, I’m not ready’ to the taxman? And more importantly, will HMRC even bother listening?

Frustratingly, none of this has been made clear. However, it was all but confirmed to us that the reason for you not being ready must be ‘coronavirus-related,’ after a tax inspector replied to a request we sent on behalf of a contractor, with the following:

“I understand that the coronavirus has affected many people in different ways, so if you believe that there have been any difficulties that would make it difficult for you to deal with us right now, please let me know and I will do the best to accommodate you.”

This suggests that HMRC reserves the right to decide on your readiness to recommence them probing your status on a case-by-case basis. So already, what on surface level seems like a grand gesture, could prove to be a red herring, or even a cynical PR exercise.

HMRC is saying ‘No’ to ‘No, I’m not ready’

For example, one contractor, who had lost their contract and therefore their income due to coronavirus, had their request to delay their investigation duly rejected by HMRC. Other than catching the virus and being admitted to hospital, surely there can’t be many other reasons to delay an IR35 investigation that should count as more valid, can there?

When reading the information we received from HMRC in response to making this request, the tax office gave little (if anything) away, regarding the reasons to keep an investigation on ice.

Largely irrelevant, except for…

We were sent a template government document, entitled ‘Supporting customers during the Coronavirus (COVID-19) situation.’ As its name rather implies, most of it has general focus, and is geared towards those with outstanding tax bills. But here, given contractors are in the midst of an investigation that is yet to conclude, there is no tax due. As a result, information around ways to defer tax payments is largely irrelevant.

One of the few parts of this guidance applicable to contractors under IR35 investigation is where it says HMRC will do whatever it can to help, notably, “if you have any health or personal circumstances that may make it difficult for you to deal with us.”

Other than this, the information sent by HMRC doesn’t reflect the situation that contractors find themselves in. To reiterate, these cases are open, meaning contractors do not technically owe HMRC anything and so cannot ask for more time to pay or appeal.

Appearances can be deceptive

The alarming (albeit expected) lack of clarity around all of this gives me even more reason to suspect that HMRC has asked contractors if they are ready to resume proceedings to look and sound ‘good,’ rather than actually mean good. 

Even so, should contractors ask for more time? Might it even improve their chances of success?

A respite may prove useful in helping gather more evidence to build a compelling argument for an outside IR35 position, but my advice to contractors is to continue with their investigations unless they have a legitimate reason to ask for a further delay. As I’m sure you’re aware, an IR35 investigation is not something you want hanging over your head for too long.

Just because he asked…

That said, I can’t speak for everyone’s circumstances. I recommend that contractors consult an IR35 specialist before making up their mind about accepting a respite or not. Yet I would add that, personally, I wouldn’t count on HMRC being overly understanding.

While the taxman might have been courteous enough to ask if you’re ready, whether he will take any notice of your response is another thing altogether.