How HMRC’s first off-payroll enquiry under the new IR35 just got closed, fast

As most contractors and all ContractorUK readers by now know, the off-payroll working rules were introduced in the private sector on April 6th 2021, writes Seb Maley, CEO of IR35 contract review firm and status advisory Qdos.

A little bit of history…

Since then, HMRC has been gradually ramping up compliance activity as it looks to claw back money it believes it’s owed under IR35. The revised Intermediaries legislation has caused issues for contractors and the businesses engaging them, with HMRC compliance checks beginning immediately after the rules were implemented. Much the same has happened in the public sector, where the off-payroll rules -- the updated IR35 -- took effect on April 6th 2017.

Another landmark moment in IR35’s history happened earlier this month, when we successfully shut down one of the very first off-payroll working enquiries. The Revenue opened the off-payroll enquiry into a client of ours, in September 2021.

Engaging over 300 contractors – the majority outside IR35 – this global business was one of the first targeted by HMRC for a review of the systems and processes they used to ensure IR35 compliance.

In total, this off-payroll investigation took 18 months to reach its conclusion. For the client, and the contractor, it’s an important result and its significance can’t be overstated.

Ultimately, it proves that these complex rules can be managed. This reality is something we hope will start putting to rest any concerns businesses have about engaging limited company contractors going forward.

Which IR35 factors were HMRC interested in during the off-payroll compliance check?

The first thing to establish is that this HMRC check didn’t scrutinise specifically the factors that led to individual IR35 status assessments.

Instead, HMRC was interested in the processes and systems our client had in place to manage the engagement of contract workers.

How clear was HMRC when outlining the scope of its enquiry?

The enquiry was broad. But we knew from the outset exactly what HMRC wanted to see, which was set out quite clearly in a ‘Schedule of Information’ issued to the client.

A number of questions were put forward by the tax office. This ranged from the number of contractors engaged by the business to whether they used CEST to determine IR35 status. HMRC also wanted to know how many contractors had been engaged in total, both directly and indirectly (through agencies, for example).

What specifically led to the closure of HMRC’s check?

In my view, it was the fact that our client provided such a comprehensive response to HMRC. But they were in a position to do so because they had engaged our advisory from the get-go.

Alongside evidence that IR35 assessments had been made in a compliant manner, this business was also able to provide a clear audit trail, evidencing robust processes that made sure of its compliance.

HMRC was satisfied with the evidence submitted.

In the closing letter sent to our client, the tax office stated that the “systems and processes you use are suitable, as the risk of you operating the rules incorrectly is low”.

Did HMRC speak to any contractors engaged by the business during its check?

No. The check was relatively straightforward in this respect. HMRC didn’t review the specific contracts or working practices of individual contractors. Neither were any of the contractors contacted, questioned or interviewed by HMRC.

But the tax office did want to see general proof of the processes used to reach the IR35 status determinations. On our advice, our client’s submission included example Status Determination Statements, both for contractors placed inside and outside IR35.

As a result, this business had evidence of the process they used when issuing status determinations to their contractors, which was enough to satisfy HMRC.

Did the number of contractors engaged make this business a target?

I don’t know for certain why our client was contacted. HMRC carries out random checks, meaning any medium or large organisation or public body could be targeted at any time.

That being said, the number of contractors it engages – more than 300 – would have meant the tax take in the event of non-compliance would have been significant.

So was this a stand-alone enquiry or one of many launched by HMRC in September 2021?

This check was part of a wider batch of IR35 enforcement activities that HMRC launched in September 2021. And that was just the first wave of enquiries -- the tax office has opened more, both in 2022 and in 2023 so far.

Some of the checks opened in 2021 are still ongoing, demonstrating just how lengthy (not to mention expensive) this process can be without insurance.

The key takeaway for contractors though, is that we now have evidence that these divisive IR35 rules can be managed. If businesses have robust systems and processes in place when engaging contractors, there’s simply no reason not to engage them.