End of IR35 soft-landing a ‘big opportunity’ for ‘militant’ HMRC

The ending of HMRC’s ‘soft landing’ for April 2021’s off-payroll rules could frighten engagers into changing contractors’ IR35 status almost overnight.

Eight contractors say they were subjected to a 24-hour reversal in their IR35 status in October 2021 -- so way before today’s moratorium on HMRC penalties ending.

But both events are linked by the same fear from clients of getting caught by HMRC with incorrect determinations and from April 6th 2022, incurring hefty penalties as a result.

'Galling'

 “I’ve been deemed inside IR35 and so have seven others with our appeals lodged but already knocked back,” a contractor at Network Rail (NR) said in October to ContractorUK.

“It’s galling to see praise of NR for its PSC ban U-turn due to the appeal knock-back but also, as all us highly-skilled eight got moved outside to inside on Oct 1st, on just a day’s notice.”

At the time, a Network Rail spokesperson told ContractorUK of “no change” in its approach to determining PSCs, who it termed, wrongly, “public” service company contractors.

'Varying terms'

The Network Rail spokesperson also said that as an arm’s length body of the Department for Transport, it engages a large number of PSCs on “varying terms.”  

Network Rail’s accounts for April 2020-March 2021 signal as much, given 316 of its 1,323 off-payroll hires were inside IR35 (versus 33 outside IR35, and 977 not subject to IR35).

As to the alleged overnight IR35 status change for the eight six months later, in October, the NR spokesperson said PSCs were not “prohibited” from appealing IR35 decisions.

'My appeal was turned down'

But the contractor is defiant. He stands by his account of his IR35 status being changed overnight -- a risk that today’s all-clear for HMRC to penalise clients appears to enhance.

And such overnight IR35 status changes are explored by Andy Vessey, head of tax at Kingsbridge exclusively today for ContractorUK.

“My agency say they appealed on behalf of us, yet the appeal was turned down,” the Network Rail contractor says.

“I was then sent details of two umbrella companies which I could have used to keep on contracting at Network Rail. But no, I worked one more week and then I quit.”

'35% of PSCs quit; 28% of engagers cut freelance work, 20% blanketed'

Research published today, to mark IR35’s soft-landing ending, implies that despite a penalty-free tax year for all but deliberately non-compliant engagers, quitting has been in vogue.

Thirty-five per cent of contractors have shut their companies since the 2021 rules hit, shows a You Gov poll for the Association of Independent Professionals and the Self-Employed.

Twenty-eight per cent of outfits that engage off-payroll workers said that the number of freelance opportunities they offer has fallen, adds the poll of 501 businesses.

Furthermore while companies are meant to assess IR35 status on an individual basis, a fifth of the businesses made “blanket assessments,” lumping all PSCs inside IR35.

'Militant'

Technology recruiter Matt Collingwood worries it may be a sign of things to come.

Boss at VIQU, Mr Collingwood told ContractorUK: It’s been one year since IR35 reform was introduced in the private sector which means HMRC’s ‘soft landing’ ends now.

“So expect a militant approach by HMRC going forward, and just hope – hope, the pressure HMRC applies doesn’t make clients revert to the ‘blanket inside’ approach we saw last year.”

Reassuringly, HMRC clarified yesterday to ContractorUK that it will not charge end-clients any penalties in an existing or future IR35 checks for careless mistakes made in 2021/22.

'Helping organisations get things right'

So while HMRC will still address past IR35 non-compliance, including asking that errors get corrected and any resulting tax/NICs gets paid, officials claim they won’t monetise pre-April 6th 2022 oversights.

An HMRC spokesperson said: “The ‘light-touch’ approach that applied to penalties in the first year was put in place to give organisations a chance to adjust to the reforms.

“We have already delivered an extensive education programme on the reforms and, moving into 2022/23, we will continue to take a supportive approach. Our focus is not on applying penalties, but helping organisations to get things right.”

'Big opportunity for HMRC'

Nonetheless, being able to charge penalties -- the exact penalties it has netted £263million from having inflicted them on central government departments, represents a “big opportunity” for HMRC.

Of his assessment last night to ContractorUK, IR35 contract reviewer Seb Maley explained: “Businesses guilty of non-compliance can [from April 6th 2022] be issued financial penalties by HMRC, in addition to tax liabilities and interest. 

“The tax owed due to IR35 is likely to be much bigger than penalties handed out, but you only have to look at the public sector. 

“Take the MoJ, for example. In addition to a staggering £71.1m tax bill plus £4.5m in interest, HMRC issued a £15million penalty for non-compliance.”

Chief executive at Qdos, Mr Maley says he would not be surprised if HMRC’s compliance activity” on IR35 now “ramps up across the board.”

'First HMRC targets post-soft landing are larger companies'

But big businesses are surely first in the crosshairs, warns Ranjit Dhindsa, a partner at law firm Fieldfisher.

A specialist in employment law compliance, Ms Dhindsa yesterday told ContractorUK: “It is highly likely that -- at this stage in time -- HMRC will focus on [IR35] enforcement action.

“However given that they do not have an infinite amount of resources, they will need to prioritise their reviews.

“This means that the most likely first targets are larger companies, those with a poor tax compliance history, and they will follow any information they receive about breaches from whistle-blowers.”

'Increasing costs of getting IR35 wrong'

From today, HMRC penalties for misapplying the off-payroll working rules in the private sector will fall into line with the department’s standard approach to tax compliance.

That means for the tax year 2022-23, HMRC has the power to issue penalties in relation to IR35, for both a failure to take “reasonable care” and deliberate non-compliance.

So penalties are tied to behaviours, not size of organisation (large and medium-sized companies are equally affected, ‘small’ companies remain exempt at the time of writing).

“With this in mind,” says Qdos’ Mr Maley, “it’s more important than ever for businesses to ensure their IR35 compliance, given the cost of getting things wrong is set to increase.”

'Nudge of some kind'

When the eight contractors complained of Network Rail changing their status overnight (which NR denies), a former Revenue inspector said her old boss had probably been in touch.

“I suspect someone at the rail organisation may have had a visit from HMRC, or a nudge of some kind,” Kate Cottrell, now of Bauer & Cotrell said at the time.

“Either way, those affected need to take advice from a good contract reviewer and fast.”

'Confidential'

The Network Rail spokesperson declined to say (at the time) whether the taxman had been in touch, saying only:

“All discussions and correspondence Network Rail has with HMRC is confidential.”

A large medical company came under HMRC scrutiny because of its IR35 assessments more recently -- in the first quarter of 2022.

'Ominously quiet'

But on Friday, those representing the affected PSCs said that in recent weeks, communications from HMRC in relation to the investigation had turned “ominously quiet”.

So yesterday’s clarification from HMRC that it won’t issue penalties post-April 6th 2022, for pre-April 6th 2022 careless mistakes, will likely be welcomed by those caught up in the probe.

The Revenue’s clarification comes after Qdos operations director Nicole Slowey advised that, with the end of the soft landing, “full confidence” in IR35 compliance was now “crucial” for clients.

Sounding similarly focused on compliance, Adam Topham of 34square has posted about a ‘client-contractor capability’ offering “a right of substitution essentially unchallengeable by HMRC, even if never used.”

And at Fieldfisher, Ms Dhindsa is recommending a “clear strategy about who is responsible for compliance,” and also to help avoid HMRC penalties, good record-keeping in the event Status Determination Statements are disputed.

'Contractor told to make LinkedIn profile for outside IR35'

Yet HMRC’s penalty criteria -- deliberate non-compliance and not taking reasonable care, might miss some of the attempts underway to feign IR35 compliance.

Speaking on condition of anonymity, an agent revealed: “Naming no names, I can tell you a respected City firm asked a contractor to doctor their LinkedIn profile, prior to offer stage.

“The reason? The firm wanted to make the contractor look like a ‘consultant’ as opposed to a BAU Support Analyst, so they could justify taking him on an outside IR35 basis!

“That’s even though the role is clearly inside – ‘BAU’. For the firm, it lets them keep the rate low. If not, they must cough up another £100 a day to get him to accept on an inside basis.”

'Agency contracts automatically put us inside IR35'

But it’s not just end-clients who in the scramble to appear IR35-compliant to HMRC, just as penalties become issuable, risk rubbing contractors up the wrong way.

“Everyone working for my agency [and two other large agencies] working ultimately for the end-client has been told they are inside IR35,” a contractor says.

“But not by the client. Rather, all our agencies have already signed an agreement that they will deem all their workers inside IR35!”

Asked about contractors having their hands tied on IR35, the founder of a nice staffing firm said her business didn’t partake. Not that it matters tremendously because, it seems, the client calls the shots.

'IR35 assessment is a bit of a joke'

“We don’t enter into framework agreements re IR35. Each role we place is supposed to be individually assessed, by the client, prior to recruiting it and so in theory, we work on a case-by-case basis.

“Having said that,” the staffing boss continued, “most clients have their set stance on IR35 and so the assessment is a bit of a joke really.”

Told that not all agents have IR35 handcuff clauses and suggested he could try to sign-up to one that doesn’t, the contractor suggested he’d rather add to the 35% of PSCs who have shut.  

“I’m off mate, sorry. An agent with or without IR35 handcuffs? It’s a bit like soft landing and now no soft landing! I just can’t be bothered fighting the fight. Good luck to those who can.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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