HMRC starting IR35 compliance checks? National Rail U-turning? Neither is a surprise
Reports have surfaced this month confirming that HMRC has already begun IR35 compliance checks in the private sector.
The development came courtesy of the Institute of Chartered Accountants in England and Wales (ICAEW), which said clients of contractors in the oil and gas, banking and finance sectors had received letters from HMRC, asking them to confirm that they are complying with the off-payroll working regime of April 2021.
It is not surprising that HMRC have commenced their compliance activity, writes Matt Fryer, group compliance director at Brookson, especially in these sectors which have traditionally been heavy users of contractors. But it is likely that HMRC will now ‘spread their wings’ into other contractor-heavy sectors in the future.
Clients and not agencies in HMRC’s cross-hairs
A key point to note is that HMRC have commenced compliance activity by focussing on the end-hirer. Many commentators considered that it would be the agency or the fee-payer that would be the starting point for HMRC off-payroll investigations. However, this is not playing out. But this too is not surprising to me, because by focussing compliance activity on the end-hirer, HMRC are focussing on the party which is responsible for undertaking the status determination and producing the Status Determination Statement.
Hirers who have attempted to take a short cut and save on costs by relying on other parties (perhaps the agency or the contractor) to pay for and produce the SDS may struggle to convince HMRC that they have met their obligations under the new rules. Again, that shouldn’t be a surprise either, but it will be a nasty shock to those who cut corners without necessarily realising they were cutting corners, potentially because they were advised to.
Off-payroll triers, and failures
This beginning of off-payroll enforcement by HMRC comes on the back of high-profile public sector IR35 enquiries. The Department for Work and Pensions, the Home Office and (even the ultimate adjudicator of status decisions) HM Courts and Tribunal Service, have each reached settlements with HMRC, after they incorrectly assessed off-payroll workers using HMRC’s CEST tool.
Potentially reassuring to those who’ve tried on off-payroll but failed, in February 2021, the government announced a ‘soft landing’ period for the new IR35 framework, meaning it would take a lenient approach to penalties for the first year of the new rules. Wrongly, some organisations imagined this 12-month commitment would also mean that HMRC wouldn’t commence compliance checks within the framework’s first year. However, guidelines released by the Revenue earlier this year clearly indicated that they would be committing resources to ensuring that businesses correctly understood and applied the new IR35 legislation. There were warnings to this effect too, by status experts at the time, but busy, pandemic-hit or simply not clued up businesses might now be on the receiving end of the sort of surprise they could do without.
Hard truths of the soft landing
So what does the IR35 soft landing mean then, in practice? Well, HMRC’s now-underway compliance checks will identify which organisations are taking their new responsibilities seriously, by following the department’s new IR35 guidelines correctly and demonstrating ‘reasonable care.’ Those that have failed to put in place adequate processes or have failed to act at all won’t fare well.
On the other hand, it is likely that if an organisation can assure HMRC that they are doing everything they can to demonstrate ‘reasonable care’ in accordance with Chapter 10 ITEPA 2003, HMRC will not pursue the matter any further. But contractors should be in no doubt – if their end-user has taken short cuts to meet the April 6th commencement, the organisation risks being considered non-compliant and so action to recover any tax owed either from the organisation, or its supply chain, must now be a more firm prospect than it was before the ICAEW’s update.
Revenue isn’t comfy with outsourced services
One of the strategies adopted by some organisations to address IR35 reform was to ramp up the use of outsourced services, or Statements of Work, in an attempt to shift the IR35 liability from themselves to the outsourced service provider. But far from asleep at the wheel, HMRC have recently warned against the risks of structuring such arrangements incorrectly. And more than just that a warning – the tax authority is specifically asking questions about ‘outsourced services’ in the new off-payroll compliance letters issued over the course of the last month. Surprising or not, this is clearly an area HMRC are uncomfortable with and intend to investigate further.
Already though, the fear of being targeted by HMRC has left some organisations hesitant to use contractors. The truth is HMRC investigations are not the only financial threat to businesses posed by a ‘poor’ IR35 solution (-- sole reliance on automated tools, for example, is now being increasingly warned against). Nonetheless, many businesses that decided pre-April to ‘play it safe’ by implementing blanket bans on the use of contractor using personal service companies, are now starting to see challenges in securing talent to deliver projects on budget, and on time.
IR35: Step back, re-evaluate, implement afresh – à la Network Rail
Thankfully for bonafide contractor companies, there are new, welcome signs that some organisations are now realising that it’s not too late to take a step back, re-evaluate their existing approach to IR35, and then implement a more effective, compliant and robust solution which will appeal to contractor talent.
A case in point is Network Rail. The public sector body has reportedly over the past weeks made a U-turn to its initial blanket ban on contractors working outside IR35. It’s a move that we hope will encourage other organisations to follow suit.
Such a U-turn by the transport body (which is at arm’s length from the DfT) is good news for the infrastructure sector. As job vacancies reach an all-time high, we are already seeing contractors being able to ‘pick and choose’ the companies and projects they work on. By getting IR35 right, Network Rail will invariably have a competitive advantage when it comes to securing and retaining talent.
Interestingly, Network Rail’s status determinations (showing 74% of contractors to be outside IR35), broadly aligns with our own findings. We found that 72% of contractor roles were determined as outside IR35 when we ran assessments for clients. This partly demonstrates the clear risks of a blanket ban, which could result in increased costs and (or) a shortage of candidates for as much as three-quarters of the contractor roles.
The train operator’s long delay? Not viable for profit-makers
In Network Rail’s case, it has taken nearly four years to reconsider their approach to contractors and IR35, and implement a compliant solution.
With profits at stake at the end of its own projects and programmes, the private sector will have to react more quickly, if it is to remain agile and grow in today’s competitive skills environment amid new commercial pressures.
And finally contractors, here's a ‘due diligence’ indicator…
Lastly, our message to contractors. When working with a new business, it’s important to have an open conversation with the hirer about IR35 and how they have accessed whether your role is inside or outside IR35. While HMRC is currently reviewing the oil and gas, finance and banking sectors, other sectors may be next on the list. The best course of action is to look for businesses that are openly advertising IR35 status on job advertisements, as this is an indicator that they have done their ‘due diligence’ and implemented a comprehensive IR35 solution. Then, at least, you’re minimising the scope for your own nasty surprise.