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HS2 under HMRC's IR35 spotlight

Julian Ball

Julian Ball | Legal Director

Friday 19th Aug, 2022

Yet another government department is now under review for non-compliance with the IR35 legislation, further demonstrating the level of confusion and misinterpretation which surrounds this highly complex area.

This time around it's High Speed 2 (HS2), sponsored by the Department for Transport, which is under HMRC’s spotlight for a potential liability of £9.5m for non-compliance between April 2017 and November 2020. Although still in the early stages of investigation, HS2 has now made a provision in their 2021/22 annual accounts in preparation for having to pay this substantial tax bill, which if they are found to have fallen foul of IR35, would take the combined total tax liabilities to date from government departments to in excess of £272m.

It would be fair to assume that government departments who work closely with HMRC would be well placed to receive the appropriate level of support and guidance to ensure that their processes with regards to compliance around the IR35 legislation are correct, however, several departments have been hit hard in terms of liabilities arising from non-compliance. The latest blow is even more significant since the deputy Chair of HS2, Sir Jon Thompson, was the CEO of HMRC between 2016-2019, and was at the helm at the time that the off-payroll reforms were introduced.


What went wrong?

The question that HMRC posed is “who has the responsibility to complete a status determination statement (SDS)?” HS2 did not believe it was its responsibility. HMRC disagreed.

HS2 believed that a third party they were contracting with supplied a genuinely outsourced provision of labour (on a contracted out services basis). In this scenario, the responsibility for determining the IR35 status would instead fall on the third party company. However HMRC disagreed, they believed the third party company may have been simply providing contractors to HS2, which would then mean the responsibility does fall with HS2, who in this case would be the end client.

HS2 also confirmed in its report that it had used HMRC’s CEST tool, along with the accompanying guidance for several placements. This latest investigation for non-compliance has further put into question the credibility of HMRC’s tools to the contingent labour industry and highlights once again its flaws.


A lesson to be learned

Although the HS2 investigation is only in the early stages, it is definitely one to watch.

A clear take away for all organisations who could be affected by IR35 is to ensure that they conduct their own due diligence, review their supply chains and communicate with other parties to ensure all parties are compliant in their approach. By examining their arrangements (and primarily their contracts), they can determine and agree on their own IR35 responsibilities including which party is required to complete the SDS. Don’t just accept a sub-contractor’s assurance.


What happens next?

Cases such as these could lead to government bodies taking a “blanket approach” and placing all contractors inside IR35, in an attempt to avoid the risk. This overly risk adverse approach is not only non-compliant, but threatens the success of any projects as many highly skilled contractors would simply move to another project elsewhere. The right approach is to have a robust IR35 process in place.


Seek expert advice

Although HMRC's CEST tool wasn’t effective for HS2, it can still be a useful tool in certain circumstances, but it is clearly important for companies and contractors (who still operate under the old rules), to seek out expert guidance and utilise IR35 services, such as those offered by PayStream’s IR35 Comply review service, to help them navigate this complex area.

Related article - Our advice to assess and manage IR35 risk

Now that the ‘soft-landing’ period is over, as expected HMRC seems to have ramped up its investigation work surrounding non-compliance. HMRC’s need to raise revenue for the treasury is more pressing than ever and it will no doubt be encouraged to target large businesses where the fines and tax liabilities for non-compliance may be significant.

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