What IR35 off-payroll investigations will look like for contractors from April 2021
When focusing on IR35, the combination of incoming reform to the private sector and a government desperate to raise tax revenue to repair the damage caused by COVID-19 is leading to unrest among contractors.
There is widespread concern that opportunities to work outside IR35 will become limited from April 6th 2021, as medium and large private sector firms become responsible for assessing status.
This fear is underpinned by the fact that an increasingly aggressive HMRC (that has now quietly restarted its tax compliance activity after a brief pause due to COVID-19), can continue to investigate contractors for work completed up until this date.
And that fear is being felt on top of the fear around an off-payroll investigation itself, and what the HMRC enquiry process might look like once the IR35 legislation changes on April 6th 2021, writes Seb Maley, CEO of status advisory Qdos.
HMRC is righting (perceived) wrongs
We’ve already seen evidence of HMRC’s desire to right what it perceives as wrongs, with the tax office recently appealing Talksport presenter Paul Hawksbee’s slim IR35 case-win last year. We’re yet to hear the verdict, but it may prove important in a wider sense for contractors. Should HMRC overturn the original tribunal decision, it may give the Revenue the confidence to open up proceedings against other contractors whose IR35 status isn’t clear cut.
Taking this into account, along with the fact that next year it won’t be contractors who are approached by HMRC but the end-client, what will IR35 probes look like when private sector changes are finally introduced?
Do we foresee any changes other than the obvious? What can contractors do - if anything - to contribute to these enquiries? And how can contractors continue to protect themselves despite losing the right to determine IR35 status next year?
Are significant changes to the IR35 enquiry process expected?
We don’t imagine that the IR35 enquiry process - as outlined here - will change hugely when the reform lands next year. Although, the tax office will approach the end-client rather than the contractor.
However, that’s not to say the information HMRC asks for will remain the same. From what we’ve seen in the public sector, HMRC may send out general compliance letters, in which they want to gather more information before narrowing things down and opening up what we know as a typical enquiry.
HMRC will likely open up proceedings with what it would describe as a seemingly routine ‘compliance check’, in an attempt not to set off alarm bells from the word 'go.' That said, these are likely to be taken very seriously by firms, if the situation contractors engaged by GlaxoSmithKline find themselves in is an indication of things to come. Last year, HMRC opened up enquiries into 1,500 of the pharmaceutical company’s contractors at once, essentially accusing them all of IR35 non-compliance. The letters were nothing short of aggressive, with the onus on the contractor to prove their innocence.
Taking this into consideration, we imagine businesses that find themselves subject to an IR35 enquiry post-April 2021 will experience something similar - blanket enquiries that, in actual fact aren't so much an enquiry, more an allegation of guilt.
When it comes to the enquiry process, it may remain largely the same next year, but with businesses to receive the correspondence, rather than the contractor. This goes something like this:
The opening letter
Judging by letters received by public sector bodies, HMRC’s opening letter demands a whole host of information - a lot more than contractors are currently asked for. This includes:
- Asking the end-client how they determined IR35 status (who was responsible, was CEST used?)
- How IR35 compliance was ensured (requesting a clear audit trail)
- How many contractors the end-client engages
- How many contractors fall inside/outside IR35
- Asking the end-client to identify outside IR35 contracts
- Whether inside IR35 workers have been encouraged to work via an umbrella/become employees
The end-client will then respond to HMRC’s enquiry, but this is something we strongly advise against doing without expert help. This is a crucial stage in the investigation process and one where an enquiry can be stopped in its tracks should the right evidence be submitted.
Drawing from our experience supporting public sector organisations, there could be much more to-ing and fro-ing than there currently is, via email and letters.
HMRC will be keen to see evidence of a clear audit trail and details regarding the contractors deemed as outside IR35.
If HMRC suspects that outside IR35 contractors belong inside IR35, a face-to-face meeting may be requested, with compliance officers asking to meet with those involved in the IR35-decision making process, such as HR, along with the contractor’s manager. If an agency has contributed to the assessment, we wouldn’t be surprised if HMRC approaches the recruiter too.
This can be daunting, but it’s worth noting that businesses - like contractors - are under no obligation to meet with HMRC. It’s a situation fraught with risks and one that needs to be carefully managed.
If, following measured IR35 advice, a meeting is declined, HMRC will return in due course with its own assessment, most likely after requesting even more information. If a meeting is attended, HMRC will go away and consider the evidence put forward before returning with a verdict.
Inspector weighs things up
It can take months, even years, before HMRC decides if the contract or contracts - following the evidence gathered - belongs inside or outside IR35. If the tax office is satisfied, then the enquiry ends. However, let’s say HMRC returns with an inside IR35 verdict, the contractor (under the existing rules) or the fee-payer (under the reform) can appeal. Before escalating this to tribunal stage, an independent review or even HMRC’s Alternative Dispute Resolution service - when a different compliance officer takes a view of the situation - are avenues perhaps worth exploring first.
The appeals process can drag on for some time. We’re told HMRC is working hard to resolve these cases in shorter time frames and, given the sums at stake not to mention the stress contractors are under when being investigated, this must happen. Whether it will, however, is another question altogether.
There are a handful of other considerations that are worth bearing in mind, when the reform of the IR35 legislation arrives on April 6th 2021. I’ll take a quick look at them now.
12-month ‘soft landing’
Treasury minister, Jesse Norman, promised a “soft landing” to the changes, meaning fee-payers will not be expected to pay penalties for errors made regarding IR35. As we explained when the news of this emerged, this is a red herring - penalties are not tax liabilities due. Tax liabilities far outweigh the penalties handed out by HMRC in an IR35 case. With this in mind, we are advising that private sector firms do not pay too much attention to this - in other words, it mustn’t get in the way of businesses making accurate IR35 determinations.
Taxman’s plan of attack
Will investigations be random or targeted under the reform? And will the standard IR35 investigation ‘triggers’ still catch HMRC’s eye? It’s difficult to say, but there are likely to be specific sectors or roles where HMRC has an inkling that non-compliance is widespread. For example, the GlaxoSmithKline blanket enquiry suggests that the pharmaceutical industry could be an area of interest.
I wouldn’t be surprised if firms with large numbers of contractors also somehow catch HMRC’s eye either, given the tax office will no doubt want to record a big IR35 win after so many high-profile losses in recent years.
As always, the Revenue will keep its cards close to its chest, but if HMRC mirrors its approach in the public sector, we may see technical aspects of a contract - such as Substitution or Control clauses - being queried.
SDS to be factored in
The arrival of a Status Determination Statement (SDS), which end-clients must provide contractors with, could signal the beginning of the end for Confirmation of Arrangements (CoA) documents - or at least when a contractor is engaged by a medium or large business. When a contractor works with a ‘small’ company, CoA documents are still very worthwhile.
The SDS, much like a CoA, is written confirmation of IR35 status, and will be shared with all parties in the supply chain. Failure to supply an SDS will see the end-client pick up the IR35 liability, which shows just how important HMRC views it to be in maintaining some form of transparency regarding assessments.
Whether it’s the tax office’s first port of call in an IR35 enquiry remains to be seen. However, there’s no doubt that it will prove important in demonstrating to HMRC that the end-client has met its obligations. With this in mind, if a contractor thinks an SDS is inaccurate, we urge them to challenge it.
Agency involvement may prove vital
In many cases, recruiters will carry the IR35 risk when reform arrives, as the fee-payer. As a result, many agencies are collaborating with end-clients, helping them make accurate IR35 decisions to protect their own financial interests.
Where this happens, it can only be good news for contractors, who will benefit from better-informed IR35 assessments. Contractors may also find that in the event of an investigation, their recruiter is able to put forward compelling evidence to shut down an enquiry, having been involved heavily in administering IR35 themselves.
How can contractors contribute?
Given contractors will soon lose the right to decide their IR35 status, many independent workers have given up hope - working off the basis that their client will wrongly force them inside IR35.
Granted, in some circumstances this may be the case. But elsewhere, and assuming a contract is deemed outside the legislation next year, despite not ultimately making that decision, contractors can still play a role in safeguarding tax status. We’d like to add to the useful information here about protecting yourself against HMRC in an IR35 enquiry, with the following tips reflecting the April 2021 change in the legislation:
- Gather evidence that shows you run a legitimate business. From email chains that demonstrate outside IR35 status - whether the absence of MoO or Personal Service, or that you aren’t controlled by your client - anything to strengthen your position as a service provider rather than an employee is likely to be beneficial. Be prepared to show your client and HMRC this, if called upon.
- Consider an IR35 status review. While your client will decide status, an IR35 contract review shows further ‘due diligence’ and an objective, considered, expert assessment of your status. It also may prove important in helping your client assess you as outside IR35 initially - as might a working practices review, which assesses the day-to-day reality of your engagement.
To round things up, while from April 6th 2021 the process of an IR35 investigation will remain in many ways the same, activity in the public sector suggests blanket enquiries could continue into the private sector, with HMRC requesting a lot more information from the end-client.
With IR35 changes now a certainty, contractors can and should begin to prepare for IR35 reform themselves, while the involvement of agencies - when they take a measured approach to the reform - may prove important in end-clients successfully evidencing their compliance.