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Contractor Tax Protection Tax Liability Cover (TLC35) and IR35 insurance from Qdos Consulting

IR35 status and the new HMRC penalties regime from April 2009

Published on Feb 13, 2009 |

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A new HMRC penalty regime takes effect from 1st April 2009, covering errors made in tax returns and other related documents for tax periods from 1st April 2008 onwards.

The new rules will impose greater penalties where people haven't taken sufficient care to get matters right, with the taxpayer taking far more responsibility to ensure they submit accurate information to HMRC.

What is "reasonable care"?

According to HMRC guidance, the definition of "reasonable care" isn't an exact science:

"Every person must take reasonable care, but 'reasonable care' cannot be identified without consideration of the particular person's abilities and circumstances. HMRC recognises the wide range of capabilities and circumstances of those persons completing returns or claims."

What does it mean for contractors?

From 1st April 2009, contractors will need to prove that they have taken "reasonable care" in showing that their contracts are not caught by the IR35 rules.

More than ever, contractors should always keep accurate tax (and related) records.

What steps should contractors take?

In a recent IR35 article on Contract Eye, Bauer & Cottrell made it clear what contractors need to do in order to comply with the new rules:

"IR35 concerns 'relevant engagements' which unfortunately means each individual contract and extension. You should have each contract reviewed together with the working practices. If a contract has been extended resulting in any changes to the services provided and/or the working practices this will also need to be reviewed. This action will also protect against the new HMRC penalty regime which comes into effect in April 2009."

The recent Dragonfly IR35 verdict illustrates why, more than ever, contractors should review their IR35 status and mitigate their exposure to risk.

In its October 2008 report (PDF), Professional Passport, recently pointed out that, as a minimum, contractors should:

"...ensure that all contracts, extensions and renewals are supported by a professional status review to demonstrate 'reasonable care' and prevent HMRC from imposing penalties."