HMRC sends IR35 compliance letters to oil & gas and FS sectors

The Revenue has sent letters to businesses requesting information about how contractors and off-payroll workers are being engaged in light of the new IR35 rules, now in force. HMRC has opened formal compliance checks with several businesses in the oil and gas and financial services sectors to review compliance with IR35. 

A reminder, the new IR35 tax rules came into force for the private sector back in April, shifting liability for determining how contractors should be taxed onto the business that engages them. Previously, it was down to the contractors to self-declare whether they should be taxed in the same way as salaried workers, inside IR35, or as off-payroll employees, outside IR35. However, in HMRC’s view, this system of self-declaration was being misused to minimise employment tax liabilities, hence the rules change.

Computer Weekly covers this. They report that HMRC has told them that their action is the result of ‘changes in engagement models’ emerging within these sectors, which, they say, are renowned for being heavily reliant on personal service and limited company contractors. Computer Weekly’s article includes a link to a sample copy of the Revenue’s letter. 

Tax specialist Penny Simmons has been writing about this development for Outlaw. She explains that whilst the letters may have come as a surprise to some businesses, they are not a surprise to her, given the pressures on the Treasury as a consequence of the Covid-19 pandemic and the long lead in time given to businesses before the changes came in. 

So let’s hear more about the letters and the sectors that have been targeted. Penny joined me by video-link to discuss this. I started by asking what is the Revenue is so worried about?: 

Penny Simmons: “That’s a good question. It’s not necessarily what the Revenue are worried about, it’s what the Revenue is seeing and in many respects I'd say it's what they be expecting to be seeing. They expect to see changes to engagement models in response to the new IR35 rules, in response to businesses looking at their supply chains. So actually what I think we are seeing now is the Revenue saying, okay, well, let's get a better handle of how businesses have changed their engagement processes, and how businesses have changed their engagement models, and we want to understand a little bit more about that so we can see where the market has moved, if you like.”

Joe Glavina: “The Revenue’s letters have gone to businesses in the oil and gas and financial services sectors only. Why have they picked on just those sectors?”
Penny Simmons: “That’s another good question. What I would say, what I would expect is, that both the oil and gas in the financial services sector are sectors that historically have used a very large number of contractors and so they have had a very large number of contractors who would then be using personal service companies, PSCs. So it's natural, really, that the Revenue would say, well, let's go to sectors that that we know were heavily reliant on contractors operating through personal service companies, and see how they are applying the rules.”

Joe Glavina: “In the lead-up to the reforms coming into force, Computer Weekly reported several instances of firms in the oil and gas, and financial services, issuing hiring bans on limited company contractors as a deliberate ploy to sidestep the new rules. What do you make of that?” 
Penny Simmons: “Firstly I’d say this is nothing new. Actually, we had announcements back in the Autumn of 2020, well before the rules came into force, and even earlier, businesses, particularly in the financial services sector, were simply not going to engage with temporary workers through limited companies. I'm not sure I'd agree that it's a sidestepping the rules. It's a way of managing tax risk and it's a very effective way of managing tax risk because what a business has said is we are concerned about the tax risks to us, and the compliance risk because of the compliance requirements that IR35 imposes on businesses engaging with contractors through limited companies, we are concerned about those risks. What's the best way to de-risk here? Well, the most simple way to de-risk is simply to say we are not going to engage with contractors through limited companies and once we don't engage with contractors through limited companies we don't have to deal with IR35 as both a compliance and a tax risk issue. That's not to say there aren't other risks and other tax issues to consider with alternative engagement models, but IR35 would no longer be an issue.”

Joe Glavina: “There’s research out there by BDO that found that 55% of the businesses they surveyed are saying they will worry about off-payroll reforms when businesses return to a more normal footing post-COVID. Is that wise?”

Penny Simmons: “Absolutely not. I think that regardless of COVID, businesses need to engage with the IR35 rules. In fact we had a delay of 12 months for implementation of the rules directly as a result of COVID. The rules came into force in April 2021 and the Revenue has engaged and significantly now with businesses and stakeholders. They have published numerous communications saying they want businesses to engage with the rules and they want businesses to make sure that they're compliant. Although the Revenue has talked about there being a light touch to penalties for non-compliance in the first 12 months, what the Revenue hasn't said is that means you don't need to pay IR35 taxes when they’re due. All they said is that we may not impose a penalty on you if you make a mistake in how you're complying with the rules but we still fully expect you now to get on board, to engage with the rules, and to look at how you are engaging with contractors through limited companies and to make sure that you've got robust compliance processes in place.”
Joe Glavina: “Last question Penny. Is the anything else you want to add?”

Penny Simmons: “The only thing I would say is that the letters that have surfaced from the Revenue aren't really a surprise because the Revenue has been engaging on this for quite some time now that they expect businesses to look at IR35 as more than just about tax risk, but about a compliance process and having sufficient oversight of their supply chain and to be able to identify where they are engaging with contractors through limited companies.”
If you are interested in reading the letter that HMRC has been sending out then you can. It is available from a number of different sources on the web. We have put a link to one of them in the transcript of this programme.

LINKS
- Link to example letter from HMRC (source: ICAEW’s website)