Following private sector IR35 reform in April 2021, HMRC compliance activity was indeed always a matter of ‘When, not if’, so it comes as no surprise that in November 2022 they started sending out off-payroll compliance letters. While this may be a trickle of letters at the moment, this is likely to cascade in the future. Kingsbridge’s IR35 Project Manager – Ryan Dawson, talks in more detail about these letters and what you should expect if you receive one.
Ryan said, “Come 6th April 2023 it will be two years since IR35 reforms came into effect, so it was always likely that we would see some kind of compliance activity once the new rules had time to ‘bed in’. This has come in the form of letters requesting information from end clients in order to check they are complying with the aforementioned rules.”
So how are these new letters different?
The current compliance letters are different to the previous ones, as under the former rules they were sent directly to the contractor. They asked for standard information such as an income breakdown for the period under review, copies of contracts and any other documentation that could assist an investigation. The tone of the letters was very direct and formal.
The new letters, however, are being sent to end clients rather than contractors since end clients now hold the responsibility of determining a contractor’s IR35 status. The tone is – if not entirely soft – non-aggressive. It’s very much in the vein of wanting to work with businesses to ensure they are applying the rules correctly. In fact, the focus is very much on collaboration, with HMRC stressing that the letter merely indicates a compliance check, not suspicion of wrongdoing.
What are HMRC requesting?
Initially the letters state that HMRC would like an informal chat to ascertain compliance. However, as the letter also includes a schedule of information, it’s clear that the chat is just a starting point. It’s important to note that the requested information is not needed in advance of the chat.
The schedule of information being requested varies, such as, but not limited to:
• Any documents the business uses to operate the rules.
• An explanation of whether there is any difference between engaging PSCs directly or through agencies.
• The number of workers you’ve directly engaged, and the split between inside and outside IR35.
• Confirmation of whether you’ve used CEST or something else to help determine status.
• The number of workers previously engaged via PSCs who’ve subsequently entered into employment contracts with you. (this is interesting as HMRC assured contractors they would not look back historically at their past engagements with a company)
Once you have sent all of this information, compliance checks are then risk assessed. If HMRC decides everything is in order, the check will be closed down.
However, if it’s determined that you are not compliant, and you are a high risk, an investigation would likely be opened. This could see you or the fee payer (if that is a different organisation) owing HMRC money in unpaid taxes, National Insurance and/or the apprenticeship levy. The exact amount would be determined through the investigation.
If this investigation reveals that you, the end client, have not taken reasonable care when issuing a Status Determination Statement (SDS) then the liability for any fees and penalties could well revert to you, rather than the employment agency fee payer, if applicable.
Ryan commented, “It’s also worth noting that, as HMRC remain committed to their ‘soft landing’ approach in the first 12 months of off-payroll reform, there would be no penalties payable for those in receipt of compliance checks unless it is deemed that you have been deliberately non-compliant, i.e. you have committed fraud.”
In situations where HMRC apply penalties, these are based on a percentage of the tax owed and levied based on behaviour, ranging from ‘careless’ to ‘deliberate non-compliance’. If you are deemed to have been careless and it’s your first offence, you can apply to have your penalty waived.
How can you protect your organisation?
IR35 compliance checks can be time consuming, costly and stressful, therefore it is worthwhile engaging with an expert in IR35, such as the specialist team at Kingsbridge. They should not only be able to help ensure you have compliant systems and processes in place, but should also able to represent you during an HMRC IR35 investigation.
Ryan continued, “If you decide to proceed without specialist support, the next thing to do is to follow the instructions laid out in the letter. Starting with that ‘informal chat’ HMRC has requested. That is, of course, as long as it does remain informal. You’re under no obligations to answer more detailed questions.
If any do come up, you are within your rights to say you cannot answer that right now and will be sending those details as part of the requested schedule of information. It’s also a good idea to share news of the compliance check with other interested parties in the supply chain. You’re not obliged to do this, but it is courteous since it could have knock-on effects for them, particularly the fee payer.”
Inform the relevant people.
If you have IR35 insurance you should notify your insurance broker or claims handler, prior to talking with HMRC, as well as notifying any independent tax advisers, so you can discuss the best strategy to ensure the compliance check or investigation can be quickly closed down.
Having that discussion will help flag areas that HMRC may query, for instance, while it’s advisable to avoid the use of employment terminology in documents pertaining to contractors, your organisation may use these terms as umbrella terms in dealing with all workers. If this is the case, you may want to add explainers in an accompanying letter so that HMRC does not flag this and query it.
In terms of how much information to give, Ryan finished by saying, “Provide no more and no less than HMRC has asked for, with the exemption of explainers to mitigate the risk of additional questions.”
Hopefully this in-depth article can help give you some guidance. There are various ways to protect your organisation from these compliance checks, even before you receive a letter from HMRC. IR35 insurance, for instance, can cover the fee payer’s risk by covering monies owed to HMRC as the result of an investigation. It gives that piece of mind knowing you have a team of experts working on your behalf. Watch our recent webinar
