HMRC begin IR35 compliance checks
6 months have passed since the IR35 reforms to the private sector, but it has
been reported that HMRC has begun IR35 compliance checks – specifically for those in the
energy and finance sectors. Last week, the Institute of Chartered Accountants revealed
that HMRC has been issuing letters to organisations in these industries, to
find out more about their process of hiring contractors working through their
own intermediary, such as through a Personal Service Company (PSC). The letter
states this is to ensure that organisations are supported in correctly applying
the off-payroll working rules (otherwise known as IR35).
reforms, which came into effect on the 6th of April this year, saw
the responsibility for contractors employment status shift to the client that they
engaged with. This followed on from the public sector IR35 reform, which
occurred back in April 2017.
What are HMRC compliance checks?
The compliance checks, not to be confused
with enquiries, are being conducted per HMRC’s briefing of 15th
February 2021, ‘supporting organisations to comply with changes to the
off-payroll working rules (IR35)’ , which sets out the department’s
taxpayers who are trying to do the right thing and comply with the rules;
taxpayers meet their responsibilities under the off-payroll rules;
taxpayers correct mistakes, where necessary; Check
that mistakes are corrected;
and correct non-compliance with the off-payroll rules; Challenge
tax avoidance schemes to avoid the off-payroll rules or otherwise to reduce the
a specialist team to carry out the work.
Financial services, oil and gas sectors targeted by HMRC on
As reported by the Institute of Chartered
Accountants, it is organisations in financial services, oil and gas that have
received the compliance letter from HMRC. Whilst it was expected that HMRC
would undertake some compliance activity around the off-payroll rules, and
indeed it has been predicted that this would happen 6 months down the line from
6th April 2021, it is interesting that the department has focused on
the oil and gas, and the banking and finance sectors. Before lockdown, these
were the sectors that HMRC had been targeting for a number of years by
conducting IR35 enquiries into contractors who were working within these industries.
HMRC wasted no time in completing IR35 checks
Hirers within these sectors would have only
had to complete their first employment intermediaries report by 5th
August, covering the period 6th April to 5th July 2021,
so it is doubtful that HMRC has sufficiently interrogated these reports to lead
them to suspect there is something awry in these industries. It, therefore,
could be speculated that HMRC has specifically targeted these areas to identify
individual contractors that they may have had their sights on pre-6th
April 2021, to gather information en masse and more efficiently, before
deciding whether or not to initiate separate IR35 enquiries into some Personal
Service Companies. Whilst HMRC
has committed not to use information acquired as a result of the changes to the
off-payroll working rules to open new enquiries for previous tax years, the
department waive this assurance where they have reason to suspect fraud or
other criminal behaviour.
These contractors would, of course, have
been working ‘outside’ IR35 before 6th April 2021 and continue to be
treated as such by the same engager after 6th April. Where a contractor
has been working for the same organisation for a number of years, the potential
tax and NIC yield could be significant. This is due not only to the earning
power of these highly skilled workers but also because HMRC can go back at
least 4 years if the department believes they can successfully challenge the
status decisions made thus far.
What can organisations do?
Organisations receiving these compliance
letters should not panic and think that they must be doing something wrong, as
that may not be the case at all. An immediate response is not required, it is
important to remember that HMRC are not conducting these checks by personal
visit but rather by telephone or in writing.
Instead of having a telephone conversation
with HMRC, you could elect to deal with their request by post or e-mail, such
is the right of the taxpayer. The advantage of adopting this approach is that
should HMRC have any supplementary questions then proper consideration can be
given to the responses rather than being put on the spot and saying something
that may be open to misinterpretation by HMRC and that could lead to further
unwanted HMRC scrutiny.
Whilst this may delay the compliance check,
this can be minimised if communication is made by e-mail. HMRC will maintain
that, in the absence of a face-to-face meeting, a telephone conversation will
be the best way to expedite the compliance check but this should be resisted if
the hiring business is not comfortable with this, as it is their taxpayers
right to do so.
How can Kingsbridge help?
The letter concludes by saying that “If
you have an adviser acting on your behalf, you may wish to show them this
letter.” At this point, Kingsbridge can pick up the baton on behalf of the
organisation and act as the buffer between them and HMRC. If you have received
a letter, Kingsbridge can support you via it’s consultancy offering. We can
also provide additional support, from specialist IR35 defence to IR35 training.
Whether you are currently partnered with Kingsbridge or not, get in touch with
our specialist IR35 team, who will be able to talk through your options. To
find out more, just email IR35@kingsbridge.co.uk
or contact us.