With only a few months until the Off-Payroll rules are extended to the private sector, many hiring firms are making knee-jerk recruitment decisions based on an inflated perception of the tax risk imposed by the new legislation.
HMRC started the fire, the flames of which have since been fanned by firms with vested interests advocating an overly risk-averse approach to compliance.
Some firms have been scared into adopting an “on-payroll only” stance and will find themselves at the back of the queue when the market hands out talent. However, the IR35 bogeyman really isn’t that scary, and the supply chain can be well protected if it adopts a robust compliance-led process. In fact, evidence shows that the fallout from non-compliance can be far more real and damaging.
For businesses that are unwilling to engage with the Off-Payroll rules, it will be the fear of IR35 that damages their competitiveness and their bottom line.
Off-Payroll risk, debunked
The chances of being subject to an HMRC investigation are already very small but further diminished by rigid compliance practices. Based on the IR35 status assessments that we have conducted to date, and recent survey statistics, we estimate roughly 250,000 UK contractors will be working under ‘outside IR35’ working conditions once the market returns to normal.
Realistically, HMRC may struggle to enquire into more than 2,500 cases per year and has so far lost roughly half of the IR35 cases that have reached the tax tribunals. This suggests that an engagement stands a 0.5% chance of being subject to a successful challenge by the taxman.
It is also important to note that HMRC’s inspectors typically target the low-hanging fruit, meaning firms that conduct comprehensive status assessments further diminish their chances of attracting the taxman’s attention.
Even if HMRC comes calling, evidence gathered throughout the engagement reinforcing the status determination should prove enough to halt an investigation dead in its tracks or, at the very least, form the basis of a comprehensive tribunal victory.
In the rare event that a compliant business succumbs to an HMRC challenge, the risk imposed upon the firm’s other contracts is limited by the fact that the taxman is required to tackle each engagement on a case-by-case basis. This means a company does not need to worry about a tax bill spanning its entire contingent workforce based on a single HMRC victory.
What will non-compliance mean for agencies and hirers?
Though Off-Payroll compliance renders tax risk minimal, this has not prevented some businesses from exaggerating the dangers of the legislation for their own gain. Some firms are using fearmongering tactics to encourage firms into risk-averse responses, typically resulting in the onboarding of entire contingent workforces onto a consultancy’s associated payroll model.
But though such blanket measures negate the tax risk posed by Off-Payroll, they too pose significant threats. Indeed, according to our recent survey of more than 3,000 contractors:
- 65% of respondents said they will seek to avoid working ‘inside IR35’
- 72% of contractors said they would quote a separate rate for ‘inside IR35’ engagements
This means recruiters and hiring firms that fail to consider ‘outside IR35’ engagements will find themselves at the back of the queue when the most sought-after contractors decide on their next engagement while those that jump the queue will have to pay a premium.
Adopting a compliance-led approach to Off-Payroll
Contrary to popular belief, mitigating tax risk while remaining competitive via Off-Payroll compliance is not that hard to achieve. However, agencies and hiring firms must work together to ensure that:
- Status assessments are accurate
- Ongoing working conditions continue to reflect the deemed status
- Evidence reinforcing the deemed status is documented throughout the engagement
Parties also need to take care to satisfy the Off-Payroll’s ‘reasonable care’ requirement. Highlighted in section 61NA(1)(a) of the legislation, reasonable care must be demonstrated through the provision of a Status Determination Statement (SDS) detailing the reasons behind a status decision.
Though satisfying such requirements for each individual engagement may seem like a tall order, compliance solutions are available that tick the necessary boxes and reduce users’ workloads.
IR35 Shield is a software solution that supplements fast, case law-backed status assessments providing hiring firms and agencies with the necessary tools to take a compliance-led approach. Furthermore, individual status assessments come accompanied by an SDS containing full reasons for the determination, satisfying the legislation’s reasonable care requirement.
But though it will likely prove an effective deterrent, a compliance-led approach cannot completely prevent the taxman’s advances. It therefore pays to be prepared in the event of an IR35 investigation.
HMRC begins its Off-Payroll investigations by posing various questions about the engagement to the hiring firm. And provided the firm can provide ample evidence that its regime is robust, an expert tax advisor should be able to shut down a case before it has even got going.
However, if HMRC proceeds with its investigation, don’t panic. Though HMRC has published a tool promoting its own view of IR35 in the form of Check Employment Status for Tax (CEST), the taxman cannot override the actual law.
Any successful challenge against the deemed status of a contractor would require HMRC to convince a tribunal judge that the engagement is within scope of IR35, which is an incredibly tall order when the defendant and all parties in the supply chain are armed with evidence provided by their compliance-led approach.
Securing added protection through insurance
One thing agencies and hirers shouldn’t do is rely on insurance alone to protect them against HMRC. Insurance products are not a substitute for compliance and policies will not provide cover where the claimant has failed to fulfil their own obligations. Remember, if you do things properly, you shouldn’t need insurance. However, IR35 can sometimes be subjective and, therefore, insurance could prove useful as an additional, inexpensive layer of protection underpinning your compliance efforts.
When selecting an insurance policy, make sure it includes at least six years to cover any claims for carelessness that would result in the enquiry window going back that far.
It’s also important to ensure your policy provides adequate cover throughout the courts. Even if you win at the First-Tier Tribunal, HMRC can, and often does, decide to appeal these cases to the Upper Tribunal (UT). UT cases require that the losing party funds the costs of the winning party, so it’s imperative that your policy provides this cover.
Don’t fear the IR35 bogeyman
Of course, a case even reaching any tribunal is an incredibly rare scenario where parties have adopted a compliance-led approach. IR35 Shield partners with specialist tax underwriters to help resolve any HMRC investigations into our clients’ engagements, aiming to ensure they don’t reach the tribunal.
Despite some of the messages purported by HMRC and industry service providers, agencies and hiring firms have no reason to fear the IR35 bogeyman. In truth, any risks that businesses encounter will be of their own making, be it through refusal to engage contractors outside of IR35, inadequate compliance processes, or slow status assessments.
From April 2021, many firms are set to let fear of the Off-Payroll rules cause untold damage to their business. The remedy, a compliance-led approach underpinned by a quality compliance solution, is easier to apply than most realise.
