HMRC have introduced a new tax penalty regime relating to IR35 which may force IT contractors to obtain an expert review of every contract and assignment.
As IR35 concerns “relevant engagements”, contractors will need to satisfy the HMRC that they took “reasonable care” with every placement in order to avoid a penalty.
No definition of what constitutes ‘reasonable care‘ was available from HMRC but experts agree that it will generally mean seeking specialist advice in the form of both a contract review and a review of the working practices.
Consequently, contractors with more complicated affairs who seek advice from either HMRC or tax experts will be seen as having taken “reasonable care,” thereby reducing their risk of a penalty.
If the tax return is completed by an accountant, HMRC will check if the taxpayer has “taken reasonable steps to check that the agent has made an accurate return on their behalf.”
Kate Cottrell, of Bauer & Cottrell, spoke of some of the issues surrounding the changes with IR35, “It is a review of the contract and the working practices that constitutes ‘reasonable care’. Unfortunately IR35 concerns ‘relevant engagements’ so this really means a review of each and every contract”. She added that, “Clearly, this should be independent advice as advice from your accountant could constitute influence and control under the MSC regulations,”
According to the rules, parties who provide advice on whether IR35 applies to a particular engagement may be exempt from being liable under certain circumstances.
However, the regulations may still rule some accountants liable if they cannot prove they had “no involvement whatsoever, directly or indirectly, in the engagement contract with any of the parties in the contractual chain.”
Ms Cottrell explained: "Effectively these exemptions mean that an accountant could review the contract, establish and document the working practices, keep records of any challenges to the information provided, keep all records of the processes and co-operate with HMRC in the event of an investigation. The main thing that they cannot do is negotiate the contractual terms on behalf of the client. Our experience here is that many accountants prefer to refer their clients to independent suppliers of such services.”
HMRC's revised penalty regime in brief is 30% of tax owed for not taking “reasonable care,” 70% owed for a deliberate understatement and 100% owed for a deliberate and concealed understatement.
The Finance Act, the penalty regime, and the use of “reasonable care,” will come into force for all returns after April 1, 2009.
A Revenue spokesman said:
“Where HMRC discovers a failure to apply Chapter 8 Income Tax (Earnings and Pensions) Act 2003 [rules known as IR35] resulting in a failure to submit a correct P35 for 2007/08 or later years, penalties will be considered. In considering the application of penalties, HMRC will have regard to its published guidance on 'reasonable care'. Whether ‘reasonable care’ is considered to apply will be based on individual circumstances and as such it is not possible to provide general criteria. The penalty regime will apply to failures to comply with Chapter 8 ITEPA in exactly the same way as it will to failures to comply with any other piece of legislation.”
