Off payroll workers – will you pass the test?

In the run up to the introduction of off-payroll worker rule changes (“IR35”) for larger private sector businesses in April 2021, most engagers reviewed their ways of working with contractors and many made changes to how they engaged these workers. Some businesses satisfied themselves that no IR35 deductions were due, some prohibited the use of contractors other than via PAYE/NIC vehicles (e.g. umbrellas) and others sought to only engage with contractors offering ‘statement of work’ type services. It is fair to say that most engagers made quite significant changes to avoid the risk of unexpected future liabilities arising but very few have yet been tested by HMRC.

We’ve not heard too much from HMRC recently about IR35 apart from some high-profile tax cases, many of which were started before the rules changed. These cases could even be argued to be of limited value in determining the status of the “average” contractor unless you happen to be a media company or one of the other sectors in the spotlight.

We’ve had some updates to guidance see here for more detail and tweaks to CEST but nothing much in the way of publicly available HMRC activity. It is not surprising therefore that we are seeing a rise in the levels of non-compliance in IR35 when HMRC come to call.

Recently, HMRC have started to ask questions of larger employers as part of their “Business Risk Review” process. These questions look very similar to those asked of the public sector employers in the first couple of years post the changes in the public sector in 2017. The answers received then helped inform HMRC compliance activity in the public sector with numerous settlements subsequently being reached where HMRC successfully contended that public sector employers hadn’t been operating IR35 correctly.

The two obvious questions are therefore “Can we expect a repeat of this in the private sector?” and “How will our processes be viewed if that happens?”

I’m sure that you won’t be surprised to hear me say that, in my opinion, off payroll working represents the single largest opportunity for HMRC to open employer compliance reviews in the private sector with the potential to create hassle, increase administration and create additional costs that often follow a compliance review. The fact that we haven’t yet seen the large liabilities in the public sector being mirrored in the private sector is down to timing. Bluntly, HMRC have been busy with other things!

In the nearly three years since implementation, engagers could, therefore, be forgiven for taking their eye off IR35 compliance. Bad practices have certainly crept in, contractors and their hirers might have changed the way in which they work since the analysis carried out pre 2021. Some engagers have even been tempted to take poor advice or enter into non-compliant arrangements given the apparent lack of HMRC concern or activity. Apathy has started to creep in, but I’m sensing a change in attitude as HMRC activity appears to be on the increase and/or competitors seem to be able to find and retain workers more easily.

I’ve certainly had plenty of conversations which start with “we need to review our IR35 process as we are at a competitive disadvantage”. That’s fine if your processes and policies are too restrictive, but you could be opening a can of worms if your competition only have an advantage due to non-compliance.

So, how can an engager tread the fine line between non-compliance and over compliance?

The first thing to say is that IR35 compliance shouldn’t really be something you pick up and put down at will; it needs to be a continuous review process. How regularly you review your own processes etc will depend on your attitude to risk, the stance taken on how you hire contractors, the pressure from your business for change and the size of the potential tax liability if errors are discovered.

Below is an illustration of a simplified IR35 review process which illustrates the cyclical nature of the problem.

Where you start on this process will depend on a number of factors, but good questions to get you started might include:

1.??? How easily can I identify the workers in scope?

2.??? Do I already have what I think are adequate controls and procedures in place?

3.??? How well known are these to the people that need to know them well?

4.??? What recent checks have been carried out?

5.??? Am I getting “noise” from the business?

6.??? Would I be comfortable if HMRC came to call?

So. how are engagers getting things wrong?

The most common problems we’ve found recently include:

·???????? Workers who aren’t put through the agreed processes, often because the hirer doesn’t realise that IR35 needs to be considered or has been persuaded by someone else that it doesn’t apply

·???????? Labour supply contracts made to look like ‘statements of work’ when they aren’t

·???????? Actual work practices differing from those recorded on any status determination (often to manipulate the results obtained)

·???????? Inadequate status determinations being made by inexperienced managers (including workers incorrectly being assessed as within IR35)

·???????? Workers being paid under local budgets or via a ledger account that isn’t monitored adequately.

Over the next few weeks, I’ll be posting some suggestions on how you can manage each of these risks, but please get in touch in the meantime if the question “Would I be comfortable if HMRC came to call?” causes you concern.

?