Tax Inspectors to look retrospectively at public sector contractors who may fall inside IR35

HMRC plans to look retrospectively at limited-company contractors (so-called personal service companies or PSCs) who work in the public sector. The plan is in some cases ? where a possible contravention of the new "off-payroll" rules relating to past tax years is suspected ? to investigate 2016/17 assessments in light of previous work undertaken by the same contractor for the same client.

Tax inspectors


Putting aside for a moment the problems of “retrospective” investigations of contracts, this warning focuses on the immediate NOW. The CEO of the Association of Independent Professionals and the Self-Employed (IPSE) has urged contractors to take action now with regard to all current contracts with public sector clients: "We strongly recommend that, if you want to continue with a public sector client, you arrange for a completely new, properly worded contract to be in force from 6 April 2017."

'Don't merely extend'

IPSE warns that merely extending the contract with the existing public-sector client is not sufficient protection; you should have it rewritten before the new tax year.


Coming back to the issue of retrospective investigations: contractors operating as PSCs in the public sector currently deemed to fall inside the off-payroll rules as will apply from 6 April 2017, will risk having the back-history of contracts probed in what appears to be quite an unconventional way.

The contractors most at risk of being investigated under this back-history retrospective investigation model are those with pre-6 April 2016/17 contracts who have an existing or a new public sector client. You might assume that the rule applied when investigating previous contracts would be the rule that was in force in that tax year. That is where we would all be wrong! For previous tax-years can be judged according to the rules coming into force in April 2017.

In other words, the risk of a retrospective IR35 investigation is not confined to the contract the contractor currently has in place with the public sector client at the time of being "caught" up in an IR35 investigation/decision. As a commentator states: "If you're declared inside IR35 by your public sector employer … [HMRC] could then knock at your door with a frightening tax bill for all the work you carried out before April [2017]."

There is some small reassurance that an HMRC investigation is not "automatic"; it depends on a risk-assessment by HMRC, which apparently has resources to run only up to 250 new cases a year. However, the new "off payroll" rules have introduced a heightened risk-averse culture to public sector employers, which means that, as employers, in order to protect themselves, they could "dob in" contractors. There is a risk that if it "transpires that public authorities apply an 'inside IR35' position in April [2017] to those that were previously outside … HMRC will open an IR35 investigation."

Act and be cautious

Maybe we can take heart in the fact that two prominent BBC newsreaders, which HMRC thought would be "easy" to catch inside IR35, have taken their cases to tribunal in light of HMRC retrospectively applying 2016/17 assessments to contracted work previously undertaken. That leaves 98 other BBC presenters facing HMRC investigation. As the same IPSE spokesperson warns, "The threat of retrospective investigation on contracts which are deemed to be inside IR35 after April is likely to encourage more contractors to turn their backs on the public sector."

We advise

We do not advise that you immediately turn your back on all your public clients, but we advise, like IPSE, that you take note of the rules and have every contract, both public sector and non-public sector, checked for its IR35 status by a professional and rewritten to ensure it provides you the full protection.

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.


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