IR35 and ir approaches to end clients

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IR35 and IR approaches to end clients

Inland Revenue head office has informed local offices that it is completely in order for them to approach end clients for information about the working arrangements of the contractors they engage, with or without the permission of the contractors concerned. This is despite our efforts to discourage this practice and the absence of any statutory authority for the Revenue to ask questions of third parties. Section 20(3) Taxes Management Act effectively allows the Revenue to require third parties to provide documents, such as agency / end client contracts, but it does not allow the Revenue to ask for particulars, such as answers to a list of questions.

Approaches by the Revenue to end clients, whether by telephone, in writing, or by face-to-face meetings, present the following problems:-

  • The end client may find the Revenue’s enquiries intrusive and tiresome, or even unnerving, and may blame the contractor, thus jeopardizing a valuable relationship.

  • The Revenue often speak to someone, perhaps in the HR department, who knows nothing about the contractor or the services provided, let alone the day-to-day working arrangements, and therefore the information obtained is unlikely to be accurate.

  • We know of one case where the Revenue Inspector telephoned end clients and made status decisions on the basis of answers to five cursory questions. In view of the acknowledged complexities of status considerations, it is unlikely that this evidence would be adequate to make a reliable decision, even if the answers to the questions were accurate.

  • The representatives of end clients who respond to Revenue enquiries are unlikely to understand the legal implications of the questions, and may say whatever they feel the questioner wants to hear, merely to bring the interview to a swift conclusion.

  • The Revenue have a habit of asking leading questions that are designed to elicit predetermined responses. One example was the opening question to a meeting: “How do you control these subcontractors?” This was a closed question that assumed a level of control. Another example is the question about personal service: “Whose responsibility is it to recruit a replacement, should the contractor be unable to complete the contract?” This question assumes that the contractor needs to be replaced, in which case the responsibility to recruit another contractor would lie with the end client. But the question ignores the possibility that the contractor had a right of substitution, in which case if the original worker became unavailable, the contractor could recruit a replacement worker. Another example: “What discussion took place about the contractor’s exposure to financial risk?” If the end client says “none”, the Revenue will use this to argue that there was no financial risk to the contractor. But why should the end client know or care about the contractor’s financial risk, let alone wish to discuss the subject? And another: “Was the contractor interviewed for the job?” This question assumes the existence of a “job”, as opposed to a contract to provide services, and seeks to trap the respondent into representing a business meeting as a job interview.

  • The Revenue often tries to base its status decisions on generic information, on the assumption that what applies to one contractor must apply to all. This is clearly unfair, especially as they only tend to use generic information when it suits the Revenue rather than the contractor.

  • We know of cases where the representative of the end client has said something that is demonstrably untrue. For instance, one respondent stated categorically that the contractor would never be allowed to work away from the client’s premises. The fact of the matter was that the contractor involved had always been allowed to work from home, and for the last several months of the engagement the contractor had worked almost exclusively from home. This sort of situation is very worrying, to say the least, for the contractor concerned.

What can be done about this? Qdos will continue to challenge the Revenue on the subject of approaching third parties without consent and without a statutory basis. We think there are people in the Revenue who sympathise with our view, and we know that our opposition in this regard does have some effect. What else can be done? I set out below some steps that contractors might take to deal with this problem.

    1. It is possible to prepare well in advance, by maintaining a file of evidence that can be used to defend your position, in the event of an enquiry. So if the end client provides the Revenue with inaccurate or misleading information, it can be effectively refuted. There are products on the market that help contractors to do this, such as the FO35 manual, available from shout99.

    1. What if you are already under enquiry and you fear that the Revenue might approach your client for an interview? Firstly, you might point out to the client that there is no legal obligation to answer any questions. If the client does not wish to appear uncooperative towards the Revenue, they could ask for the questions to be put in writing. (Incidentally, the Revenue will often begin their approach by writing or asking to speak to the client’s Contracts Manager).

    1. If the Revenue have asked to speak to your client, you could ask a professional adviser to brief the client on the sort of questions that are likely to be asked. If necessary, you could arrange for your adviser to meet with the client’s representative to explain the position.

    1. What if it is too late for this and the Revenue have already spoken to your client? In this situation it is crucial that you should not panic. Remember that you do not have to accept untruths, inaccuracies, or the Revenue’s attempts to twist the facts. One Status Inspector said that regular working hours were characteristic of employment, while irregular working hours were characteristic of an employee working under “flexitime” arrangements. Why should you have to accept such prejudiced nonsense? Remember that it is hardly ever too late to present evidence and arguments to support your case. You have a right of appeal. If the client or the Revenue say something that is untrue, then you should point that out to the Revenue. Try to support your position by providing documentary evidence or detailed information to back up what you are saying. And bear in mind that once you have disproved or undermined one thing that has been said, it may well cast doubt upon the rest.

If the worst comes to the worst, what sort of evidence can be put forward, to counter inaccurate or misleading statements by the end client? That rather depends upon what has been said and the facts of the case. However, just as an example, if the client says that you were not allowed to work from home, you might be able to provide copies of emails or itemized telephone bills to prove that you were in fact working from your own premises. If this is not possible, you could provide details of what dates and times working at home took place, and describe the work undertaken. The more evidence or details you provide, the more the Revenue might come to realise that their case is not as strong as they first thought. The more specific you are, the more credible you will appear. If it is claimed that you did not use your own equipment, provide precise details of the equipment used. If it is said that you were not required to correct defective work at your own expense, supply details of corrective work done and the dates concerned.

In my experience of defending contractors against IR35 enquiries, the contractor will often have useful information that the adviser may not have asked about, simply because the adviser lacks an in-depth knowledge of the contractor’s profession. For instance, if the end client is persuaded by the Revenue to say that the contractor worked under the supervision of a manager, it might be possible for the contractor to provide precise examples of occasions when the contractor not only made the decisions, but also overruled the client’s representatives. But it is no good just saying that this happened. Detailed examples have to be given. If necessary, the adviser should be able to couch things in such terms as to enable persuasive facts to be given to the Revenue, without jeopardizing client confidentiality or the security of technical data.

Keith Preece

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