In April last year, shortly before the General Election, Rachel Reeves pledged £555m to strengthen HMRC’s compliance work, funding that Labour said would pay for more staff to bolster its investigations team and modernise its systems. By the time the manifesto was published in June, that commitment had risen to £855m. It was a clear signal that HMRC enforcement would be a priority for the new government and that’s what we’re seeing, with a noticeable increase in correspondence from the Revenue checking the business’s tax compliance - letters which very often arrive first on the desk of HR. We’ll speak to a tax expert about how HR should respond.
The latest figures show that HMRC’s Customer Compliance unit alone has grown by more than 3,000 staff in the past year. In its August performance update, HMRC reports a compliance yield of £9bn in just one quarter, along with over a hundred charging decisions and dozens of prosecutions. Clearly the Revenue’s enforcement drive is underway.
For HR, the area of tax which is most relevant is probably IR35. A reminder. This is the label given to the tax legislation designed to counteract tax avoidance by taxing ‘disguised’ employment at the same rate as would apply in an employer/employee relationship. It is used to assess whether self-employed individuals or contractors are working genuinely with that status, or if they are working as ‘disguised’ employees, with all the same responsibilities as a full-time employee, without having to pay the same tax and national insurance. The responsibility for making that determination now lies with the end-user client.
When the Revenue raises questions about IR35 compliance HR is often the first point of contact. If letters HMRC are ignored, what starts as an enquiry can quickly become a full investigation, with liabilities mounting as the process drags on. So HR’s response, or lack of a response, is very important.
So let’s hear more on this. Penny Simmons is a tax expert who regularly works with clients’ HR teams when HMRC comes calling and earlier she joined me by video link with this message:
Penny Simmons: “First and foremost, I'd say that HR are pretty valuable when it comes to IR35. In fact, in my experience, they're pretty integra and the reason they are often so integral to IR35 compliance within a large business is because, very often, they are the ones who are tasked with liaising with different parts of the business. So, for example, procurement, who might be involved in the initial requests from a manager for temporary labour, so the need to say go to a third-party agent to resource some services. Invariably, we are seeing that HR are involved and I think it's crucial that HR is involved because they're all about - I'm not an employment lawyer, as you know - but they're all about working with people and managing people and IR35 might be a set of tax rules, but it is all around the engagement of people, not employees, but people and how those people work and what those people are doing for the business and what their relationship with the business is, and very often HR are best placed to manage IR35 compliance processes, be that making status determinations or, if they're not making the determinations because they are not trained, if you like, to apply the tax rules, because making determinations can be difficult, they are certainly in good positions to make sure that once those determinations have been made the status determination statement which simply reflects the IR35 determination and provides reasons for it, that that is passed down the supply chain. So, it's passed to the worker, and it's also passed to any agency, or to the agency that the business is directly engaging with. Don't forget, Joe, that there may well be the need for a dispute resolution process. Now, the IR35 rules allow for a client-led dispute process and those dispute processes are around IR35 determinations. So, you know, where the worker or the agency disagreed with the determination that a business had made as to whether a worker is inside or outside IR35. Now we would expect that it would be HR that would be managing those processes. So, in order for HR to manage an effective client-led dispute resolution process, HR needs to understand the IR35 processes. It needs to understand how IR35 is being managed, and it needs to make sure that it's liaising closely with other teams within the business that also involved in IR35, likely to be tax legal, and procurement functions.”
If you are one of those businesses that has received a letter of inquiry from the Revenue and you’re unsure how to respond then please do reach out to Penny Simmons who will be happy to help. Her details are there on the screen for you. Alternatively, of course, you can contact your usual Pinsent Masons adviser.