Legal

Why strong evidence is key to avoiding costly IR35 investigations

22 Sep 2021 By Dave Chaplin

Most hirers have conducted an initial status assessment of their contractors since the new off-payroll rules came into force, but that’s just the first step to compliance, says Dave Chaplin

While some hiring firms are a little behind and still grappling with the reforms to the off-payroll legislation and the impact that it has had on their contingent workforce and projects, others have completed their assessments and are now ready for the next stage to complete the full compliance cycle.

On-going monitoring of a contractor’s status is needed to detect whether the contractor moves to an inside IR35 position, which could result in a build-up of tax risk. But, more crucially, it is critical to gather evidence on status throughout a contractor’s engagement. It is this evidence that could prove vital should HMRC make a challenge to a contractor’s status many years later.

Some cases that highlight the importance of evidence are RALC Consulting, which was a win for the taxpayer; and Northern Light Solutions, which was a win for HMRC. 

RALC Consulting’s appeal hearing took several days and involved detailed cross-examination of its director, Mr Alcock, along with other witnesses and a plethora of evidence was presented alongside 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. The judge preferred the evidence that was significantly more credible – 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 and Upper Tier Tribunals, the lack of cogent witness evidence meant it was difficult to counter HMRC’s Notes of Meeting, despite no officer being put forward for cross-examination by the taxman. HMRC clearly held the pen and their notes went unchallenged due to an apparent lack of support by the contractor’s client.

Both these cases serve to highlight that HMRC has the power to form an IR35 opinion based on the evidence they collate and assert. This then presents the challenge to counter and discharge the burden of proof, which can be made even more difficult when witnesses are not prepared to support the case. 

It’s important to note that this all happened in the old world of IR35 (Chapter 8 of Income Taxes (Earnings and Pensions) Act 2003), where HMRC has lost most cases. Now it’s even harder 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 now, in the ‘new world’ of Chapter 10 of the Income Taxes (Earnings and Pensions) Act 2003, we are required to consider status before the contract starts. It is therefore critical if a contract is considered to be outside the scope of IR35 to regularly check the status to see if it has changed and gather evidence during the contract to shore up the original determination.

Regular checking and monitoring is key for clients and the contractors they hire to remain confident that they are in control and of the status of their contingent workers at all times. An incorrect assessment left alone for months could prove very costly. 

And with around 60,000 businesses now affected by the new legislation along with some 500,000 contractors, 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. Such an approach will prove invaluable in the new normal of the off-payroll rules.

Cases are lost at tribunal due to several reasons, but a lack of contemporaneous corroborated evidence is the chink in the armour of most defences. Building a defence preemptively by monitoring status and gathering evidence is what will help ensure HMRC will be satisfied with your compliance and prevent your firm’s reputation being dragged through an expensive tax tribunal.

Dave Chaplin is CEO of IR35 Shield and author of IR35 & Off-Payroll Explained

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