HMRC has lost a £100,000 IR35 enquiry in yet another example of its shambolic approach to compliance.

While many contractors are worrying about the introduction of the IR35 rules into the private sector, they may not have been paying much attention to what HMRC has been doing. However, Qdos has revealed another case of a needless IR35 enquiry, lack of transparency, delay and a complete indifference to the impact their actions had on the contractors involved.

Qdos managed to get an IR35 enquiry shut down which had been going on for a year and would have resulted in the contractors involved facing tax liabilities of over £100,000. Both of the contractors were directors of a limited company.

The result was a huge relief for the contractors, but it also exposed some disturbing inadequacies.

For example, why was the company investigated at all when both the contractors regularly exercised the right of substitution on the two projects on which they worked. Despite this, it took HMRC a year to acknowledge that they were outside the scope of IR35.

While substitution does not necessarily prove the contract is outside of IR35, it does according to HMRC’s own tool CEST. In fact, this is always the case for any engagement with a right of substitution. Yet, HMRC which has shown faith in its own technology, did not use it to determine the employment status of the contractors. This was either deliberate or a case of disorganization within HMRC.

HMRC did not just target the company for an IR35 enquiry, it had also earlier instigated a Corporation Tax enquiry which makes it appear as if HMRC was determined to get the company one way or another.