IT directors could be targeted by Inland Revenue inspectors intent on gatherings profiles on IT contractors in the wake of the IR35 Act, solicitors have warned.
Hazel Ryan, head of the tax department at City solicitors DLA, said, "Since the IR35 law was passed on 28 July, we have heard reports that the Inland Revenue will be approaching both employment agencies and client companies for information on the contractors they use. It is well within the legal powers of the Inland Revenue to do this."
The Revenue said that because IR35 is a new law best practices have yet to be bedded in. However, a spokesman said, "We will approach IT managers if we think they have information that will clarify the nature of a contract. This may be if the information coming from other sources is not sufficient. The Inland Revenue has had these powers for years."
The Taxes Management Act 1970 gives the Revenue wide-ranging authority to collect evidence when assessing tax details. "As well as collecting information on the contract between the contractor and the agency, the Revenue will be interested in details on the client side to see how the job actually works on the ground," said Ryan.
She warned of a potential for conflict between confidentiality clauses in contracts and a company's obligation to comply with the Revenue's requirements.
Richard Baron of the Institute of Directors' Policy Unit said it made sense for the Revenue to approach IT directors if they employ a large number of contractors working on a standard contract.
"What we are still not sure about is whether the Inland Revenue will use information solely from the client company as the basis for their decisions on the contractor's tax situation. The law isn't especially clear on this point but I think they probably can," said Baron.
A Revenue spokesman said, "Each situation is unique and the actions taken by the Inland Revenue will depend on the circumstances. It is impossible to generalise."
Interim IT director Colin Beveridge is one of the managers who could be affected by IR35 both as someone who hires IT contractors and in terms of his own tax status. "If I was approached by the Revenue to hand over details of contractors' contracts, my first port of call would be the company's legal department. This is where a company which uses a lot of contractors may be burdened,"he said.
"If the Revenue is constantly asking for information, it may impact on resources. Smaller companies without a legal department may have to outsource this work to a third party," Beveridge added.