IR35: latest HMRC approach reinforces need for robust processes

EY has reported that HMRC has opened formal compliance checks with several businesses in the oil and gas and financial services sectors to review compliance with the new IR35 rules. Changes to the off-payroll working rules, known as IR35, came into force in April.

Tax expert Penny Simmons of Pinsent Masons, the law firm behind Out-Law said: “These letters may come as a surprise to some businesses, since HMRC has repeatedly issued assurances that it will take a light touch to penalties for non-compliance during the first 12 months of the new regime”.

“However, a decision not to issue a penalty does not mean that HMRC will tolerate businesses ignoring the new compliance and tax requirements that came into force in April. Over the past 18 months HMRC has issued a plethora of guidance as to how it expects businesses to prepare for the new regime and its announcements regarding penalties were always issued with the caveat that penalties would still be issued in cases of fraud and deliberate non-compliance,” she said.

A copy of the letter obtained by IWORK asks for a formal meeting to be arranged with HMRC to discuss how the business has implemented the new IR35 rules, including looking at the process for engaging contractors through personal service companies (PSCs) and how the business determines whether IR35 applies to the contractors.

Simmons said: “Given the pressures on HM Treasury as a consequence of the Covid-19 pandemic, it should come as no surprise that HMRC wants to ensure that businesses are complying with IR35 and that tax is being paid where it is due”.

“Where there has been non-payment of tax under IR35, businesses will be in the best position to avoid a penalty if they can show that they took reasonable measures to comply with the new regime and did not deliberately ignore the new compliance requirements. These letters reinforce messages previously delivered by HMRC as to what reasonable measures might look like – businesses need to ensure that they have put in place robust compliance processes to identify possible IR35 contractors in their supply chain and ensure that employment tax status determinations and status determination statements have been prepared and issued for all contractors that engage with the business through PSCs and other relevant intermediaries,” she said.

The letters have only been sent to businesses in the oil and gas and financial services sectors, although it is anticipated that checks will begin in other sectors in the coming months.

The IR35 rules require that employment taxes be paid by people who provide services to a business through an intermediary, usually a PSC, if that person would otherwise have been regarded as an employee for tax purposes of the engaging business. From 6 April 2021, engaging businesses became liable for determining whether the IR35 rules apply, operating PAYE and paying employers' National Insurance contributions for contractors falling within the scope of the rules. The changes do not apply to small businesses. Previously, where a private sector business engaged a contractor through a PSC, liability to decide whether IR35 applied and to pay any employment taxes rested with the PSC.