When the IR35 reform for the private sector came into effect in April 2021, in an attempt to lessen the burden to the marketplace, the government announced a “soft-landing” period of 12 months. During this period HMRC confirmed that no penalties would be issued for non-compliance and they would offer support to businesses to assist them in enforcing a compliant approach to IR35.
This caused some businesses to delay introducing new processes to deal with the off-payroll changes. However although, no penalties would be issued to businesses in the private sector during this period of grace, the tax liabilities for failing to take reasonable measures and having a robust and compliant approach to IR35 would still be due and would be significantly more than any penalties.
What now the ‘soft-landing’ has ended?
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.
Even before April, HMRC began targeting companies in certain sectors (financial services and oil and gas) by opening compliance checks regarding their IR35 strategies. This number of checks has only increased as we passed the deadline for the ‘soft-landing’.
What does a compliance check look like?
HMRC begin a compliance check by writing to the business with a set date for the business to make contact with HMRC. An initial phone call is held between both parties to discuss the off-payroll legislation and ensure it is implemented correctly. This would then be followed up with a meeting, during which the business would be required to provide assurances and demonstrate that they have taken reasonable care.
We should remember that for the effected business, it is not necessarily getting the IR35 determination correct that matters the most, but rather ensuring that they have and can demonstrate they have taken reasonable care with their IR35 approach.
Companies with a compliant and sensible IR35 strategy will be able to continue to attract and use highly skilled contractors that are operating outside of IR35.
What actions should at risk companies take?
At this stage, businesses who are impacted by the off-payroll working legislation should ask themselves two questions:
- Is our approach compliant and robust? and
- What actions should be taken for us to be certain?
Here are our top tips for assessing and managing your IR35 risk:
- Analyse your contractor base: It’s relatively easy to do a high level assessment of your contractors which will give you a guide as to how many are likely to fall inside IR35.
- Assess job roles: Once you have completed the analysis of your contractors, you may come to the conclusion that some roles will always be caught by IR35. For those that are borderline it would be advisable to carry out an IR35 assessment to better understand the position.
- Identify your business critical roles: As with your high risk titles, we advise having an IR35 assessment carried out on your business critical roles.
- Ensure a working practice review is carried out with contractors for every placement and at 12 month intervals to demonstrate reasonable care.
- Assess all your contracts: Case law has highlighted the importance of strong IR35 contracts and ensuring “template contracts” are not simply amended to attempt to factor in IR35. Having a strong contract from an IR35 perspective can be key so it is important that these are assessed.
- Transition those inside IR35: When assessing your contractors, if you find there are some who are working inside IR35, you should look to transition those PSC contractors over to a PAYE solution such as Umbrella.
- Always advertise roles as ‘inside’ or ‘outside’ IR35
Help is at hand
Although HMRC’s guidance does point businesses to their CEST tool, the flaws and limitations of their tool have been widely reported and it offers no material protection during an HMRC IR35 investigation (if HMRC don’t agree with how you have answered the questions).
In the example of HMRC vs Department of Work and Pensions (DWP), the result was a considerable tax bill of £87.9m for the DWP, despite using CEST and following all of HMRC’s guidance.
Although CEST is a good starting point, the best way to avoid falling foul of IR35 and to demonstrate reasonable care is to utilise the services of IR35 specialists.
At PayStream our IR35 Comply service goes above and beyond CEST offering a robust and comprehensive process designed to give accurate and prompt outcome and easy to digest advice. A complete breakdown of differences can be viewed here.
Wherever you are on your IR35 journey PayStream’s team of IR35 experts are on hand to provide practical, clear and tailored advice. Get in touch today by emailing ir35@paystream.co.uk.
