April 6 is fast approaching and it’s an important date in the IR35 calendar. It marks the end of the so-called ‘soft landing’ for businesses in the private sector, the 12-month grace period during which HMRC said they would not issue financial penalties for non-compliance. So with that in sight what should employers be doing? More on that in a moment.
It was 6 April last year when changes to the IR35 rules came into force meaning that the responsibility for determining whether a contractor should be deemed an employee for tax purposes shifted to end users, the engagers. From that point, end users became liable for the PAYE and NICs due to be paid to HMRC under the contracts for those services.
To help businesses, HMRC gave firms a 12 month grace period to adjust to the news rules. That has been good news, to a point. Yes, it has meant no penalties have been issued but that isn’t to say HMRC can’t demand outstanding tax liabilities from businesses within this tax year, should they find the rules have been wrongly applied. That does matter because, when it comes to IR35, tax liabilities tend to dwarf any financial penalties and, of course, there is the reputational damage to factor in.
The grace period was an acknowledgement by the Revenue that these rules are complex, but, notwithstanding the time given to figure them out, many firms have struggled. As Personnel Today reports, one in five mid-size firms are still not confident about IR35 compliance. They cite data from Grant Thornton, a survey of 605 mid-sized organisations showing only 25% of firms were very confident in their business’s compliance with IR35. They quote Matt Parfitt, a director at Grant Thornton, who says organisations shouldn’t delay focusing on addressing the new rules just because HMRC has not yet begun cracking down on non-compliance. He says: ‘The new IR35 rules can be difficult to navigate, and it is important that businesses, of all sizes, who are still unsure around their compliance act soon.’
We agree, and it’s a point we have been flagging to our clients consistently for a long time. Chris Thomas is a tax specialist who joined me by phone to discuss the advice the tax team is giving currently, across all sectors:
Chris Thomas: “Yes, so we have talked before about the implications of the new IR35 rules and what businesses should be doing in order to manage risk and try to make sure they comply with them. Now, obviously, we're a number of months down the track, these rules have been in place for nine months or so, and what we're seeing now is HMRC really starting to ramp up its compliance activity in relation to this. They started off doing that with the oil and gas sector in the autumn and they’ve been moving on to other sectors that tend to use quite a lot of off-payroll works, like financial services, and I think we have every expectation that this is going to be rolled out more generally to other sectors of the economy as well. The other point, I think, just to be having mind is that when this was originally announced HMRC did say well we have this initial grace period, if you like, a light touch period, during which, yes, we expect you to be compliant but we'll have a little bit of leniency, we probably won't be looking to charge penalties, etcetera, if you've not taken reasonable care but that is going to be coming to an end at the end of this tax year, the beginning of April. So, really, I think we are now at the point when any business that is using off-payroll labour really do need to have their ducks in a row but also be able to demonstrate how they're managing this process. They've got to have robust systems, robust processes, as to how they're doing that, and if they don't, I think, unfortunately, there's going to be limited sympathy from HMRC and, going forward, potentially significant penalty exposures if the business can't demonstrate how they've come to the right conclusion”.
Joe Glavina: “So what steps are clients taking, Chris. What are you advising clients to focus on?”
Chris Thomas: “There’s a real focus on compliance process. So it's not just about oh, well, yes, we agree with the answer you've come to in the case of this particular individual, for example. It’s really more about having a robust means of making those determinations and having the evidence to show that that process exists and has been followed consistently and, perhaps, particularly in more borderline cases, you can show that's how that's been determined and, potentially, also you would have to expect them to be looking behind the approach you've taken in making that determination. So if you assess, for example, they'll be wanting to test that you've been properly understanding what the questions are getting at and taking the approach to do those questions that HMRC would think that you should be. But more than that, I think more than just purely individuals engaged to PSCs, there's a wider piece. I think, HMRC are also probing with these reviews and one of those is agreements that the business might have with other suppliers, so not just with an individual's personal service company, but with other services that are being supplied into the business and HMRC is quite keen to understand, are those fully contracted out services? Or actually, might there be an element of supply of individuals here? Could there be something that is therefore caught by the off-payroll rules that might have been overlooked? So I think we can expect HMRC to focus on, and be wanting assurance more widely about, how supply chains are being managed and overseen and this goes back to the feature we did before Christmas in relation to umbrella companies, for example, around the importance of taking ownership, if you like, of understanding the supply chain and what protections and assurances the end client should be looking to put in place there.”
Joe Glavina: “Is there a role here for HR. Chris, and if so, what is it?”
Chris Thomas: “Yes, it will involve HR. The most successful businesses in dealing with this will have a project team that, hopefully, will have been formed previously for the purposes of getting these determinations made in the first place and working out the strategy Obviously, it's a bit of joint effort between tax and HR and procurement as well, potentially. So, it's really a case of using those internal teams to just revisit what has been done to date. Obviously, when HMRC get in touch they will do that with the tax function generally, but there will need very clear lines of communication with the HR team and we would expect them to be sitting in on any discussions there might be with HMRC because they will be well placed to feed in around things like how labour is being used and obviously it's very important for the HR function to understand how these risks are being managed. So, you're right, it isn't just an HR issue, but HR will have a key role to play in it.”
Joe Glavina: “So what’s your takeaway point for clients Chris?”
Chris Thomas: “Yes, so the final point I just want to make, in relation to what we've been saying is that if you, as a business, have already been contacted by HMRC, or indeed in readiness for the contact which is likely to come, it is very much worth revisiting the approach you've taken, revisiting the determinations you've made, but particularly having a look at the processes you’ve got and asking are we happy to justify these as suitably robust? Do we think this vulnerability is here? Do we think potentially, maybe, we've taken a bit of a flyer in the case of certain categories of people, albeit perhaps for very good commercial reasons? Are there things that need to be tightened up? Are we clear enough that there are sufficient steps in place to oversee the supply chain. So it’s best to think about all these things, if possible, before HMRC comes knocking on the do so that you can be clear if there's anything you need to do to remedy that, if there's anything you should be thinking about pre-emptively disclosing, these considerations and more widely. I would say it is worth considering whether you might want to get some sort of professional support in terms of strategy and approach in dealing with HMRC, what you do and don't disclose, how you deal with the lines of inquiry, because although they'll come to you very much on the basis of, you know, we want to have a friendly chat to help you, and in a sense that is how they see it, equally, of course, it's never quite that straightforward and you do need to be quite careful how you handle the enquiries they are making.”
Chris mentioned oil and gas and how HMRC has targeted that sector – the Revenue issued letters and opened formal compliance checks with several businesses in that sector, as well as the FS sector. Back in October tax specialist Penny Simmons talked to this programme about that in ‘HMRC sends IR35 compliance letters to oil & gas and FS sectors’. That programme is available for viewing now from the Outlaw website.
