Client suddenly deems you inside before April

[jamesbrown]

Why would the Client not share it with HMRC? Most Clients would see that as one of their implied obligations imo - if HMRC ask for something in good faith they aren't going to put their head above the parapet and say no, risking further scrutiny.

Agree. I think webberg means that there is no mechanism for sharing outside of a formal investigation, so it wouldn’t increase the probability of an investigation. But I agree with you about it being shared upon investigation. It will be shared. Also, the probability of investigation will be different in the new world because we are talking about large companies and investigations will likely target companies rather than individuals, even though the case law on WP remains the same, i.e. case-by-case.

[cojak]

Why would the Client not share it with HMRC? Most Clients would see that as one of their implied obligations imo - if HMRC ask for something in good faith they aren't going to put their head above the parapet and say no, risking further scrutiny.

This will become a common issue - we are advising clients that by September they must have a plan, by December they must have a SDS and by February they must have everyone on new contracts. They'll have to reissue the SDS post April but it's important they have time to assess the contract as it is, make changes where necessary and when they actually assess it they already know the outcome.

The assessment prior to April will be of the current contract, so if that is deemed inside then it does, to my mind, create a problem for the retrospective assignment, though the risk is low if the contract is terminated prior to April. HMRC will have plenty to go after post April so I can't see this being on their radar.

This is where my October post will be coming from.

I won't be telling people they should move to ensure that their last payment needs to be before 5th April 2020, but they need to be aware of the situation in order to come to their own decision.

[webberg]

Why would the Client not share it with HMRC? Most Clients would see that as one of their implied obligations imo - if HMRC ask for something in good faith they aren't going to put their head above the parapet and say no, risking further scrutiny.

Because the SDS can relate only to periods post 6/4/20 and as such HMRC has no legal, moral or other ability to expect that such a document has been prepared or to demand a copy.

Why would a client volunteer a document that HMRC needs in relation to an enquiry that is nothing to do with them? What good might that do? What harm could it do? And to whom?

I suppose if a relationship went bad and the client wanted to create problems for the contractor, they might volunteer an SDS, but otherwise, why?

I also have trouble with "HMRC asking in good faith". In my view any good faith brownie points HMRC had accumulated in the past have long expired and there is no valid reason for them asking for the SDS other than to further an enquiry into the individual. If the client wishes to be complicit in that - perhaps the contractor needs to think on whether they are a client worth working for,

Otherwise the steps you mention about how end clients should be preparing are all very sensible.

[ComplianceLady]

Because the SDS can relate only to periods post 6/4/20 and as such HMRC has no legal, moral or other ability to expect that such a document has been prepared or to demand a copy.

Why would a client volunteer a document that HMRC needs in relation to an enquiry that is nothing to do with them? What good might that do? What harm could it do? And to whom?

I suppose if a relationship went bad and the client wanted to create problems for the contractor, they might volunteer an SDS, but otherwise, why?

I also have trouble with "HMRC asking in good faith". In my view any good faith brownie points HMRC had accumulated in the past have long expired and there is no valid reason for them asking for the SDS other than to further an enquiry into the individual. If the client wishes to be complicit in that - perhaps the contractor needs to think on whether they are a client worth working for,

Otherwise the steps you mention about how end clients should be preparing are all very sensible.

I'm not saying I agree that Clients should provide it. If we imagine the scenario - HMRC letter drops into someone's inbox "We're looking at the tax status of individual X for tax year Y. Do you have any information regarding their IR35 status?" The Client does indeed have a formal SDS prepared as part of an audit piece, properly recorded to evidence their diligent approach. Client's options (as they see it) are to say:

A - No - we don't have anything (lying to HMRC)
B - Yes - we have something and we're unwilling to share it
C - Yes - we have something, here it is

Client would see option A as untenable, option B as opening up a discussion with HMRC and possibly putting them at risk that HMRC see them as uncooperative, liable to hide things etc. Option C presents no risk whatsoever to the Client, they will see the contractor's tax affairs as their own and will not, for even a nanosecond, consider putting their business at risk or even moderately disrupted to protect a contractor.

I'm sure there will be exceptions, but on the whole I think Clients would be happy to provide information.

I think this is something contractors should be prepared for. I am advising Clients that if you have a contractor working on an outside basis and when you make an assessment of their actual working arrangements you judge it to be inside, the contractor will likely walk. It's more attractive for most contractors to move, even to another inside engagement, than to to switch from an outside to inside without any change in arrangements.

I think this process is sometimes misrepresented in discussion as it's assumed/portrayed that an inside assessment will be a new contract / arrangement but the Client will be assessing the current contract, then, based on that assessment, will move the contractor to a new contract arrangement which is explicitly inside. The starting point will be assessing the current contract. Having said that I think the risk is slim - if the contract terminates prior to April. If the project spans April (with 2 contracts, outside / inside) then winding up the limited co offer some protection for the previous outside contract.

[ComplianceLady]

Agree. I think webberg means that there is no mechanism for sharing outside of a formal investigation, so it wouldn’t increase the probability of an investigation. But I agree with you about it being shared upon investigation. It will be shared. Also, the probability of investigation will be different in the new world because we are talking about large companies and investigations will likely target companies rather than individuals, even though the case law on WP remains the same, i.e. case-by-case.

Yes what I've heard thus far is HMRC ask for evidence of the process, if that looks okay they move on. So Clients will want to look co-operative. I'd agree though, it won't be shared unprompted.

[jamesbrown]

Because the SDS can relate only to periods post 6/4/20 and as such HMRC has no legal, moral or other ability to expect that such a document has been prepared or to demand a copy.

HMRC can certainly ask for any relevant information about any assessments conducted by the client prior to the next tax year, 20-21. Once they start an investigation, one of the first things they'll do is to ask the client about the perceived relationship. Why would the client not provide this information if they'd deemed the contractor to be inside according to CEST or whatever other mechanism had been used prior to April 2020 (and SDS post)? If the client has a record, why wouldn't they share it? The liability is either not theirs (pre-April payments) or is theirs (post-April payments), in which case they will want to defend their assessment.

I accept your argument only insofar as the client would not voluntarily share this information independently of an investigation, because there is simply no mechanism for general sharing of status determinations (there is no statutory reporting requirement to HMRC either pre- or post-April - in the form of the SDS - except within the supply chain). Otherwise, if the client is asked about a specific contractor or, indeed, all contractors, I expect the client will oblige.

[jamesbrown]

I'm sure there will be exceptions, but on the whole I think Clients would be happy to provide information.

Completely agree with you. There is every incentive to share upon request, AFAICS. The client is not liable for pre-April payments and is liable for post-April payments. In both cases, sharing makes sense.

[webberg]

I'm not saying I agree that Clients should provide it. If we imagine the scenario - HMRC letter drops into someone's inbox "We're looking at the tax status of individual X for tax year Y. Do you have any information regarding their IR35 status?" The Client does indeed have a formal SDS prepared as part of an audit piece, properly recorded to evidence their diligent approach. Client's options (as they see it) are to say:

A - No - we don't have anything (lying to HMRC)
B - Yes - we have something and we're unwilling to share it
C - Yes - we have something, here it is

Client would see option A as untenable, option B as opening up a discussion with HMRC and possibly putting them at risk that HMRC see them as uncooperative, liable to hide things etc. Option C presents no risk whatsoever to the Client, they will see the contractor's tax affairs as their own and will not, for even a nanosecond, consider putting their business at risk or even moderately disrupted to protect a contractor.

My view is that the client here would, upon receiving the brown envelope, seek the advice of their professional advisers. Let's say for argument sake that for the moment these comprise their HR team (internal or external), tax adviser and "recruiter". (I use recruiter in the sense of an external party who is more expert than the client in sourcing the talent they need.)

The HR team may argue that supplying the informal and legally invalid SDS equivalent to HMRC is being a good citizen. They may also have concerns over what message that sends the contractor and how any ongoing or future relationship may be compromised if this action is seen as damaging. Perhaps an analogy would be where an employee is let go for disciplinary reasons but HR then gets a request for a reference. I suspect HR will either decline (sends a message) or find a neutral set of words.

The tax adviser would certainly say that HMRC has no legal right to demand the information and by going to a third party without the permission of the individual or an order from a Tribunal is illegal. Why then would the end client comply with an illegal request?

The agency may say that volunteering the information is an action that may taint the end client in the eyes of other contractors. The end client and/or agency may not care if they are intending to apply blanket "inside" SDS assessments, but if they are not, then do they want a reputation of "grassing up" contractors?

So I think the proper response to such a question from HMRC is along the lines of:

"Yes, we prepared an informal SDS assessment based on our understanding of the imperfect rules available, including CEST and we took this into consideration when we constructed the legally required SDS post April. The earlier version was for [end client] use and has a number of features that may or may not be applicable to whatever enquiry HMRC is running. On the basis that the document is for internal use, is not legally required to be supplied to HMRC, is not specifically authorised or required to be released by the contractor or a Tribunal, we must decline to make it available".

It is a dangerous myth to suggest that by being less than 110% cooperative, HMRC will put the client into the "naughty boys to be investigated" pot. HMRC can open enquiries only where the law permits and within certain guidelines. I have never heard of an [end client] falling into this category by standing up for their legal rights.

Where this has happened in the past I have usually been able to have the enquiry dismissed quickly, especially where the actual enquiry is into a third party.

I understand that you are being cautious and perhaps painting a worst case scenario. I would hope that all agencies (I think this is what you are but apologies for the assumption if not) are discussing similar points with their clients. (I fear not).

I do however think that the ghosts in the machine are being imagined as a little too real.

[cojak]

The ghosts in the machine of EBT schemes and all the others were considered a little too real in 2005 (ooh look - I caught the glimpse of an apparition in 2010... https://www.contractoruk.com/forums/...ml#post1062346 )


So we will be repeating this ad nauseum.

[webberg]

The ghosts in the machine of EBT schemes and all the others were considered a little too real in 2005 (ooh look - I caught the glimpse of an apparition in 2010... https://www.contractoruk.com/forums/...ml#post1062346 )


So we will be repeating this ad nauseum.

I agree that there is a real risk that the reform will once again allow tax planners to advance "schemes" which will promise "outside IR35" rates whilst "protecting" you from an inside IR35 SDS.

We have already seen one advertising an 80% take home even when you have an "inside IR35" assessment. Yeah right.

There is a difference between the present situation and EBTs.

EBTs were legitimate and useful tools when they first appeared in the big banks. As is always the case however, they became abused conduits for tax avoidance, first in the banks and then leaking down to smaller outfits. HMRC was against them from the very beginning.

Unfortunately HMRC's legal campaign against them was - at best - inept and they made several errors which then had to be patched with legislation. Tax planners love legislation because it creates brightline thresholds and definitions that can be avoided.

Eventually HMRC won the arms race but it took them 10 years longer than it should have done and allowed the unscrupulous to prosper before filling their suitcases with fees and disappearing.

So the ghost was always in the EBT machine from day 1.

In IR35 reform, we have a clear policy objective, a relatively clear idea of what the legislation wants to achieve, legislation that whilst not perfect is adequate. The Gov't wants 90% fewer contractors being responsible for their own tax. They want tax to be collected at source (for free) and sent to them. This is clear policy.

Any scheme, arrangement, structure, operations, transaction which does less than this will be investigated and I suspect there will be very little sympathy for those found to be not in accord.