HR ‘integral’ to IR35 compliance in large businesses

Earlier in the week, on Tuesday, we highlighted the rise we have noticed in the number of HMRC investigations into businesses IR35 compliance processes and why it’s vital to respond to any correspondence from the Revenue promptly, which will help minimise that risk. A lack of response, or a rushed reply, can set hares running at HMRC and could, in a worst case, give rise to a full-scale investigation by the regulator which would be a rigorous, time consuming, and often a stressful experience for all those caught up in it. We’ll consider HR’s role. 

A reminder. IR35 is the tax legislation designed to counteract tax avoidance by taxing ‘disguised’ employment at the same rate as would apply in an employer/employee relationship. It is used to assess whether self-employed individuals or contractors are working genuinely with that status, or if they are working as ‘disguised’ employees, with all the same responsibilities as a full-time employee, without having to pay the same tax and national insurance. The responsibility for making that determination now lies with the end-user client.

As an HR professional watching this programme you might think that correspondence from the Revenue - a letter or questionnaire, typically - asking about the tax status of your contractors would be a matter for tax or legal. In fact, our tax lawyers at Pinsent Masons will often work closely with the client’s HR team and that’s a point they are keen to get across. Penny Simmons is a tax specialist and earlier she joined me by video link with this message:

Penny Simmons: “First and foremost, I'd say that HR are pretty valuable when it comes to IR35. In fact, in my experience, they're pretty integra and the reason they are often so integral to IR35 compliance within a large business is because, very often, they are the ones who are tasked with liaising with different parts of the business. So, for example, procurement, who might be involved in the initial requests from a manager for temporary labour, so the need to say go to a third-party agent to resource some services. Invariably, we are seeing that HR are involved and I think it's crucial that HR is involved because they're all about - I'm not an employment lawyer, as you know - but they're all about working with people and managing people and IR35 might be a set of tax rules, but it is all around the engagement of people, not employees, but people and how those people work and what those people are doing for the business and what their relationship with the business is, and very often HR are best placed to manage IR35 compliance processes, be that making status determinations or, if they're not making the determinations because they are not trained, if you like, to apply the tax rules, because making determinations can be difficult, they are certainly in good positions to make sure that once those determinations have been made the status determination statement which simply reflects the IR35 determination and provides reasons for it, that that is passed down the supply chain. So, it's passed to the worker, and it's also passed to any agency, or to the agency that the business is directly engaging with. Don't forget, Joe, that there may well be the need for a dispute resolution process. Now, the IR35 rules allow for a client-led dispute process and those dispute processes are around IR35 determinations. So, you know, where the worker or the agency disagreed with the determination that a business had made as to whether a worker is inside or outside IR35. Now we would expect that it would be HR that would be managing those processes. So, in order for HR to manage an effective client-led dispute resolution process, HR needs to understand the IR35 processes. It needs to understand how IR35 is being managed, and it needs to make sure that it's liaising closely with other teams within the business that also involved in IR35, likely to be tax legal, and procurement functions.”

That earlier programme on the importance of responding to any IR35-related correspondence from the Revenue promptly to minimise the risk of a mere letter turning into a full-scale tax investigation is called ‘Treat IR35 enquiry letters from HMRC as a priority, warns tax lawyer’ and is available for viewing now from the Out-Law website. We’ve included a link to it in the transcript of this programme for you.

LINKS
- Link to HRNews programme: ‘Treat IR35 enquiry letters from HMRC as a priority, warns tax lawyer’.