HMRC under fire over 'scaremongering' IR35 clampdown letters targeting GSK IT contractors

What's the motivation?

At the time of writing, it remains unclear what has prompted HMRC to target GSK’s contractors, as the tax collection agency declined to directly address the question when Computer Weekly approached it for comment on this story.       

“HMRC works to ensure everyone pays the tax that is due under the law. Our compliance activity spans a variety of industries and is focused on specific areas based on our analysis of where current risks to the tax system lie,” An HMRC spokesperson said, in a statement.

“The off-payroll rules exist because it is fair that two people working in a similar way broadly pay the same tax and National Insurance, even if one of them chooses to work through their own company.”

Meanwhile, a spokesperson for GSK said the firm is aware that “some of its agency workers” have been written to by HMRC over the course of the past week, and said it is encouraging those affected to take the matter up with their tax advisers.

While the wording of the letters seems threatening, scaremongering and disingenuous, Rebecca Seeley Harris, head of off-payroll at employment law specialist Re Legal Consulting, said contractors need not be afraid.

“Although it sounds very threatening, the letter has no legal basis,” she told Computer Weekly. “It would be wise, however, to respond and definitely not ignore it.”

Tax protection insurance

In terms of how best to respond to it, she said contractors should first check to see if they have tax protection insurance to cover them in the event that HMRC does decide to investigate their case, which can incur costs.

“Secondly, they need to check with their accountant to see if they checked for IR35. If the contractor has been to an IR35 specialist, then they should have all the evidence, including the outcome of the CEST tool. This can be sent back to HMRC to rebut the opinion.”

Computer Weekly understands that GSK is far from the only organisation whose contractor workforce was on the receiving end of such missives, but it is important for contractors not to lose sight of the fact that HMRC has no idea about the true nature of their working relationship with their clients, said Seb Maley, CEO of IR35 tax advisory service Qdos Contractor.

“Contractors mustn’t panic,” said Maley. “At this stage, the tax office will not have reviewed these contractors’ actual working practices, which are vital in determining whether a contractor belongs inside or outside IR35.”

“With the right help, independent workers subject to an IR35 enquiry will be in a position to challenge HMRC and protect their financial interests.”

Retrospective IR35 reviews

Either way, news of the letter-writing campaign is sure to fuel fears that HMRC plans to use its powers to embark on retrospective tax avoidance investigations, fuelled in part by the roll-out of reforms in recent years to the way IR35 works in the public sector.

The changes mean, since April 2017, public sector contractors have been stripped of the responsibility for self-declaring if their engagements should be classified as inside or outside IR35. Instead, it is now down to the organisations they engage with to determine that.

There are concerns that if a contractor who has previously identified as working outside of IR35 is deemed by their employer to be operating inside IR35 that HMRC might pursue that individual for back-dated tax payments, for example.

“It’s important for contractors to bear in mind that HMRC can investigate anything up to six years in an IR35 enquiry,” said Maley. “Therefore, the need to be confident of IR35 compliance is absolutely vital.”

“The tax office is under pressure to raise revenues and clearly believes IR35 is an area in which it can achieve this,” he said.

Projected figures

Indeed, the government’s own figures, published around the time of the Autumn 2018 budget, predict that the incoming changes to how the IR35 regulations are applied in the private sector are on course to net the Treasury £3bn by the 2023-24 financial year.

If that turns out to be true, it will make the IR35 private sector reforms the single biggest source of revenue generation in the autumn 2018 budget.

“With this in mind, we shouldn’t be particularly surprised that HMRC is focusing on contractors previously engaged by GSK. But that’s not to say the way it has gone about this is reasonable,” said Maley.

Indeed, Alasdair Hutchison, policy development manager at the Association of Independent Professionals and the Self-Employed (IPSE), said the letters risk adding to the “chaos” and “confusion” already caused by IR35, which is set to get worse with the private sector roll-out.

So much so, given there is already evidence to suggest that HMRC is struggling to interpret and enforce the regulations effectively, said Hutchinson.

“HMRC has lost six out of the last seven IR35 cases, and when it cannot interpret its own legislation, how can it possibly expect businesses across the UK to? This uncertainty adds a huge burden both to micro-businesses themselves and the companies that rely on them to drive innovation,” he said.