IR35 creates contractors' conundrum

Since the introduction of IR35 was announced, there have been reports on the effect it will have on IT contractors and the...

Since the introduction of IR35 was announced, there have been reports on the effect it will have on IT contractors and the industry as a whole.

On 28 July 2000, IR35 became law (retrospectively effective from 6 April 2000) and the industry's thoughts must now turn to its enforcement.

How will the Inland Revenue know when a contractor is not a contractor?

In its press release of 7 February 2000, the Inland Revenue said that it would be focusing on arrangements on a contract-by-contract basis.

There have been recent reports of the Inland Revenue asking contractors for copies of their contracts with any agencies and also contracts between agency and client in order to establish the status of the contractor.

If the contractor is unable to provide this information then the Inland Revenue may approach the agency or even the client to obtain the documents.

So how should a client company react when it is asked to produce copies of its contracts with the agency through which they hire contractors?

An Inland Revenue inspector may make the approach informally. He is entitled by law (under Section 16 of the Taxes Management Act 1970) to make a request that any trading company gives details of all payments, fees and commissions that it makes to non-employees.

This would include payments to a contractor's personal service company or an agency. The Revenue has a duty to treat all information received as confidential, but companies should be aware that handing over information to the Revenue, without being compelled to do soby law, may be in breachof any confidentiality clause contained in the contract.

If after a reasonable period the company does not provide this information then the Inland Revenue may make a formal written request, under Section 20 of the 1970 Act, that the company produces any document in its possession which is relevant to the liability of a taxpayer (namely, the contractor).

This request can only be made with the permission of General or Special Commissioners of the Inland Revenue in situations where it is suspected that the contractor has failed or may fail to comply with IR35.

A Section 20 notice should be taken very seriously and legal advice sought.

The Inland Revenue has yet to issue a formal policy statement about requesting contracts from agencies and clients, but it seems likely that where the contractor is unable to provide a copy of the contract between agency and client, then the Revenue may approach the agency or client direct.

It also seems likely that the information received will be used to form a database against which contractors' tax returns will be checked.

Recent reports of agencies being approached for copies of contracts, suggest that the Inland Revenue will be seeking to enforce IR35 extremely rigorously and that it is already collating information that will be used to work out when a contractor is not a contractor.

Summary

  • The Inland Revenue has the power to approach a client company direct for information relating to contractors

  • Be aware of any confidentiality clauses in the contract which could be breached by giving the information to the Inland Revenue voluntarily rather than through legal requirement

  • Giving information under a Section 20 notice will not usually be a breach of confidentiality but legal advice should be sought

  • Indications are that the Inland Revenue will be strictly enforcing IR35 and may already be starting to gather information as part of the enforcement process

    For further information please contact DLA Partner Hazel Ryan on 0207 796 6076.

  • This was last published in August 2000

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