Contractors’ Questions: Are clients who reversed PSC bans over IR35 at more risk of HMRC scrutiny?

Contractor’s Question: Will clients who have recently reversed their March-April 2020 decisions not to use PSC/limited company contractors be ‘top of the pile’ when HMRC comes to choosing which engagers to approach to check compliance with the new off-payroll rules from April 6th 2021?

If so, I’m hopeful that my client will keep its ban in place and just let me go through the Status Disagreement process if my SDS (Status Determination Statement) is incorrect; not that many of us contractors seem to have faith in the process!

Expert’s Answer: I don’t think HMRC will penalise end-clients for reversing a decision not to use contractors. Instead, HMRC will be focussing on whether an end-client has approached the changes to the IR35 rules by taking “reasonable care.” There is a clear pathway for end-clients to demonstrate this, as HMRC has published guidance on what they will be reviewing regarding reasonable care. 

New HMRC webinar recomitted to soft landing

In terms of targeting, I think HMRC will start with the biggest businesses first, and look to educate rather than penalise initially. In a recent HMRC webinar on IR35 reform, the Revenue stated:

HMRC will take a light-touch approach to penalties and customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance.

As a reminder, the new rules scheduled for this coming April 6th firmly place the risk and responsibility of identifying and assessing IR35 risk with end-hirer organisations. This is essentially a shift in the balance of power over the tax treatment of contractors operating via a PSC.

The hope, and the reality of the disagreement process

However, there is a client-led status disagreement process for where contractors disagree with the end-user’s decision about the contractor’s IR35 status and this was hoped to have provided PSCs (the contractors), with a means to take back some of the power in the determination process.

My view is that the disagreement process does lack teeth and the effectiveness of any challenge process is going to be, and has already been, left in the hands of the client.

But from our experience, where a client maintains open lines of communication throughout the assessment process with its contractors and offers a robust disagreement process with independent experts on hand to mediate and consider any additional evidence the contractor is able to provide, then contractors tend to accept the final determination and stay in-role. 

The key for clients is...

Those clients who do not maintain a good level of communication with their contractors are more likely to experience contractors feeling uneasy with the result, and the process, and simply walking away. That said, the availability of contract roles amid the current economic challenges may make this preferring of the market more difficult than it was in early 2020. The key for clients is to ensure that there is an effective education and communications process that runs in parallel with the status determination process. Good luck!

The expert was Matt Fryer, head of legal services at off-payroll rules advisory Brookson Legal.

Monday 9th Nov 2020
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Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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