HMRC begin IR35 compliance checks
Not even 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).
The 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 compliance principles:
- Support taxpayers who are trying to do the right thing and comply with the rules;
- Help taxpayers meet their responsibilities under the off-payroll rules;
- Help taxpayers correct mistakes, where necessary; Check that mistakes are corrected;
- Identify and correct non-compliance with the off-payroll rules; Challenge deliberate non-compliance;
- Challenge tax avoidance schemes to avoid the off-payroll rules or otherwise to reduce the tax payable;
- Use a specialist team to carry out the work.
Financial services, oil and gas sectors targeted by HMRC on IR35
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.