How likely is it that you will have a tribunal?

With the private sector IR35 reforms now only a week away, the question on many contractors’ minds is whether it will now be more likely that they will face an investigation and tribunal. The honest answer is that it’s hard to say – HMRC could well be reviewing their approach to who will and won’t face tribunals.

Here, we take a look at everything we know so far, as well as suggesting some ways in which contractors can reduce their chances of an investigation.

IR35 is coming in for a soft landing

It’s important to remember that HMRC has promised a “soft landing” for the IR35 reforms in the 2021/2022 tax year. This was initially put in place for the original 2020 launch date and HMRC has said they will honour it for the 2021 launch. This means that genuine mistakes will not be penalised as long as HMRC is paid what is owed.

When asked directly in a webinar, they answered, “HMRC has committed not to use information acquired as a result of the changes to the off-payroll working rules to open new compliance checks for previous tax years.”

“HMRC wants to reassure workers that their intermediary entity, will not be subject to new compliance checks using information from the off-payroll working reforms, for tax years prior to 6 April 2021, unless HMRC has reason to suspect fraud or other criminal behaviour.

To underline this supportive approach, HMRC will take a light-touch approach to penalties, and customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance.”

A similar approach was taken with the public sector reforms and, there, HMRC stuck to their word.

Contractors shouldn’t be lulled into a false sense of security

One of the key things to remember is that the soft landing should not be an excuse to not prepare for IR35. It’s also important to note that HMRC has said the light-touch approach will only apply where there has been a genuine mistake. This means if they believe – or choose to believe – that an error is more than a genuine mistake, they could open an investigation.

While there is certainly no reason to believe they would do something like that and it’s doubtful that clear, genuine mistakes would end up in a tribunal, contractors should bear in mind that Chancellor Rishi Sunak has an enormous deficit on his hands.

With COVID-19 costing the economy billions of pounds, and continuing to do so, he and the Treasury will have their eyes on any ways they can find to recoup money and IR35 certainly fits that bill. The government has repeatedly stated that they expect to claw back a lot of money through IR35 – somewhere in the region of £3billion – so it’s no leap to suggest that they will be looking at how to get their hands on that money as quickly as possible.

What can contractors do to protect themselves from IR35 investigation?

Well, the best thing a contractor can do to protect themselves in terms of IR35 is to not give HMRC any reason to investigate them in the first place.

It’s crucial to note here that this does not mean desperately trying to make sure you are seen as outside IR35 by changing contract wording even though your working practices may not align or vice versa.

Rather, it’s about making sure each engagement you work on is assessed fairly and accurately by your end client, that this is reflected in your Status Determination Statement (SDS), and that the correct taxes and NICs are paid by whoever is liable for them.

For your part as a contractor, this means keeping a clear and accurate record of each engagement, with details of your fees and all taxes and NICs paid. You should also ensure you have a full contract for each engagement so that it’s readily available should HMRC need to see it.

But what if you do get investigated?

With the best will in the world, you can’t predict every outcome and mistakes do happen. No matter how careful you believe yourself to be, HMRC could still find a reason to investigate you, which could end up at a tribunal.

Obviously, this is a worry for many contractors in light of the IR35 reforms, but it’s also where IR35 Protect insurance from Kingsbridge steps in.

IR35 Protect is a market-leading product that provides cover for taxes, interest and penalties for IR35 investigations, as well as general legal expenses.

What makes it unique – and here’s the really cool bit – is that it flexes to cover whoever in the contractor supply chain holds the tax liability, whether that’s you, your end client, or your recruiter. This means that it can give peace of mind to those who hire you, making you a much more attractive prospect when it comes to recruiting a contractor.

IR35 Protect is available as a standalone product, or as an add-on to our main business insurance package. To find out more about the policies available, you can call us on 01242 808740, or complete this form to arrange a call-back at a time convenient to you.