HMRC unveils new IR35 guidance

HM Revenue & Customs has replaced its IR35 ‘Frequently Asked Questions’ section for freelancers unsure about the legislation with up-to-date guidance, spanning some 19 pages.

Designed to be clearer, more succinct and easier to navigate than the old, now-archived FAQs, the guidance has been developed with the IR35 Forum and is split into six sections.

The six are ‘Intermediaries legislation;’ ‘How to work out if it affects you,’ ‘How it applies to you,’ ‘Deemed employment payment,’ ‘Contracts’ and ‘HMRC enquiries.’

Although that seems to represent a simplification, because the old FAQs had 15 different categories simply linking to more FAQs, the six sections each have multiple sub-categories.

They take account of IR35’s statutory extension in 2013 to ‘office holders’ and IR35’s administrative reforms in 2012, in the shape of the Business Entity Tests and Scenarios.

Another sub-section is dedicated to HMRC's Contract Review which, despite ongoing attempts to get more taxpayers to use it, reads as a potential stepping-stone to an enquiry.

HMRC says: “If you dispute an opinion from the IR35 Contract Review Service and the dispute can't be resolved quickly, the papers will be passed to the local IR35 Inspector.”

This will only be done with the taxpayer’s permission though and, while this process doesn’t represent a new development, the clearness of HMRC’s intent will alarm freelancers and contractors.

Employment status advisory Qdos explained: “This clarification will simply increase freelance contractors’ mistrust of the service, regardless of any assurances that HMRC try to give.

“The fact is that if the Contract Review Service thinks you are inside IR35 and you disagree, there is a strong chance you will end up with an IR35 enquiry.”

Based on the Revenue’s wording, freelancers may think that simply not disputing an ‘inside’ outcome from CRS is the answer, but the advisory warned that this has implications too.

“If you don’t want an inspector involved and do not appeal, then you’re stuck with an ‘inside’ opinion from HMRC,” the firm said.

“Down the line, if you were picked up for an IR35 enquiry and lost, you would face a hefty penalty for ignoring their initial advice.”

HMRC says that if there's enough evidence to support an ‘inside’ opinion, but the freelance contractor disagrees, then such taxpayers can ask for “an appealable decision against which you have a right of appeal.”

“Interesting,” reflected Qdos tax consultant Seb Maley “The only way of doing this would be for HMRC to issue a formal tax and NIC assessment.

“But this is effectively jumping right to the latter stages of an IR35 enquiry. The only route from there would be to take it to Tax Tribunal and beyond.”

He says the most positive aspect of the CRS guidance is that, for the first time, all of the information required of taxpayers to use the service has been documented in full.

Similarly, the IR35 position of personal service companies incorporated or resident outside the UK is clearly set out in a way not explained before by HMRC, in what Maley says is a “helpful clarification.”

Other HMRC explanations, such as on the IR35 inquiry process (including IR35 letters), may also give more certainty, as might those on expenses, VAT and multiple-person contracts.

The confusing and therefore often misunderstood IR35 area of substitution is also addressed in the tax authority’s guidance, albeit partly in a way that freelance contractors will find unsettling.

Qdos said: “One point of concern is the rather ambiguous second paragraph under ‘The right to substitution’, which states that the right doesn’t exist if the client’s permission must be obtained.

“Obviously a fettered substitution clause is no good, but the guidance doesn’t seem to allow for any kind of notification or agreement of a proposed substitution, other than for ‘security reasons’.”


Jul 15, 2014
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