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Essential advice for maintaining off-payroll compliance

Dave Chaplin, CEO - IR35 Shield

Recent IR35 status cases that have come under the spotlight at tax tribunal serve to highlight the importance of regularly monitoring the status of your contractors and gathering evidence to shore up the original status determinations made.

Evidence gathered throughout a contractor’s engagement by all parties in the supply chain could prove vital should HMRC challenge a contractor’s status in the months and years that ensue. And, just as important is the on-going monitoring firms should conduct to regularly check the status of a contractor and detect if they are moving to an ‘inside IR35’ position which could result in an accrual of tax risk.

RALC Consulting (TC/2018/08950) and Northern Light Solutions (UT/2020/000353) are two IR35 cases that have made the headlines recently, the former was a win for the taxpayer and the latter a win for HMRC. In the case of RALC Consulting, the appeal took several days and involved detailed cross-examination of its director Mr Alcock as well as a number of other witnesses and an abundance of highly credible evidence was presented along with relevant case law.

The burden of proof was fully discharged and the judge allowed the appeal. In that case, HMRC’s evidence was found lacking, with the contents of one document described by the judge as being hearsay and filtered through the mechanism of an HMRC note taker. Using the rules of evidence, the judge preferred the evidence that had considerably more credibility – and no amount of cross examination was going to support the uncorroborated claims made in notes written by an HMRC officer.

In the case of Northern Light Solutions, which had its appeal dismissed by both the First Tier Tribunal and Upper Tier Tribunal, the lack of cogent witness evidence meant it was difficult to counter HMRC’s Notes of Meeting which had been signed by the contractors’ client, despite no Officer being put forward for cross-examination by HMRC. HMRC clearly held the pen and their notes went unchallenged due to an apparent lack of support by the contractor’s client.

Both cases highlight the power that HMRC holds to form an IR35 opinion based on the evidence they gather and put forward, which then present the challenge to counter and discharge the burden of proof, made even more difficult when witnesses are not prepared to come forward and support the case. It’s important to note that this all happened in the old world of IR35 (Chapter 8 of ITEPA), where HMRC has still lost over half of the cases being appealed. Now it’s even tougher for them.

In the old IR35 world, we had to consider status after the events had taken place, where all the evidence was available. But today, in the ‘new world’ of Chapter 10, we are required to consider status before the contract starts. It is therefore critical if a contract is considered “outside IR35” to:

  • regularly check the status to see if it has changed
  • gather evidence during the contract to shore up the original determination

Frequent and routine checking and monitoring are important for clients and the contractors they hire to remain confident that they are in control and assured of the status of their contingent workers at all times.  An incorrect assessment could prove very costly. Today, there are around 60,000 businesses now affected by the new legislation along with some 500,000 contractors, so with such a mammoth tax to face, assessment and ongoing monitoring can only be achieved using an innovative mix of automation and human intervention. Adopting an automated solution is the only way to conduct a monthly check of every single worker’s IR35 status and gather vital evidence as it occurs.

Cases are lost at tribunal for a variety of reasons, but a lack of synchronous corroborated evidence could be the fatal flaw in most defences. Taking the pre-emptive move to shore up your defence by actively monitoring status and gathering evidence will help to ensure HMRC’s satisfaction with your compliance process and, in turn, will prevent your firm’s reputation being dragged through the muddy waters of an expensive tax tribunal.


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