HR plays ‘key role’ in IR35 compliance, says tax lawyer

Last week we highlighted how the number of tax investigations carried out by HMRC is set to rise under the new Labour government. The Chancellor Rachel Reeves has promised significant new investment in HMRC including £555m for the Revenue to employ more staff, bolster its investigations team, and modernise its systems. Tax expert Penny Simmons told this programme about the problems a business can run into if enquiry letters from the Revenue are ignored, in particular the risk of triggering a full-scale investigation and the problems that brings. We’ll consider how HR can help businesses avoid escalation. 

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 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.”

Last week’s programme on the expected rise in the number of tax investigations we expect to see under the new Labour government it is available now for viewing from the Out-Law website. That’s: ‘IR35 tax investigations set to rise under UK’s Labour government’. We’ve included a link to it in the transcript of this programme for you.


- Link to HRNews programme: ‘IR35 tax investigations set to rise under UK’s Labour government'