A review of the promises made by HMRC in advance of IR35 changes
HMRC have issued a briefing document ahead of IR35 reform in the private sector, outlining the tax office’s ‘compliance principles’, which include a raft of promises to help businesses comply with rapidly approaching changes.
By releasing this guidance, any remaining hopes of another delay to incoming reform, which will be introduced on 6th April, seem dashed.
The changes will see medium and large businesses become responsible for determining the IR35 status of contractors engaged, with the fee-paying party to be transferred the liability should all legal obligations be met in the supply chain.
In this article, we’ll explore the key points raised by HMRC’s compliance principles and their implications for businesses currently preparing for IR35 reform.
HMRC promises businesses further support
Throughout the guidance, HMRC have promised to work closely with businesses, collaborating with them to help ensure the successful implementation of IR35 reform.
From identifying and correcting mistakes to supporting businesses that are trying to do the right thing, these compliance principles point towards a more understanding approach from HMRC – one that may have stemmed from the problems faced in the public sector following similar reform in 2017.
But should businesses simply take HMRC’s word for it and adopt a more relaxed attitude towards IR35 compliance because of the help offered by the tax office? In a word, no.
Compliance is at odds with CEST
The fact HMRC understands that businesses need support in ensuring IR35 compliance is a positive development. However, by continually promoting the use of its IR35 tool, Check Employment Status for Tax (CEST), the tax office is actually endangering compliance.
For a wide variety of reasons – which we have detailed here – CEST is not fit for purpose. As a result, IR35 specialists across the board continue to stress the importance of not relying on the tool to provide accurate answers regarding a contractor’s IR35 status.
‘Light touch’ to compliance is a red herring
As part of the Government’s ‘light touch’ approach to reform, HMRC reiterated that businesses will not receive penalties for non-compliance in the first 12 months, unless there is evidence of deliberate foul play.
While on the face of it this is a generous offer from HMRC, it could be considered a red herring. If a business mismanages IR35 reform and fails to meet its legal obligations, the tax office will still expect all outstanding liabilities to be paid – and in IR35 cases, tax liability is much greater than penalties handed out.
Retrospective IR35 enquiries cannot be ruled out
HMRC have said they won’t typically open up new IR35 enquiries into contracts that shift from outside to inside IR35 as a result of the reform, but this cannot be discounted entirely. Neither can retrospective IR35 investigations that scrutinise completed contracts, when contractors carried the liability.
By allowing themselves to inspect engagements if they “suspect fraud or criminal behaviour”, HMRC have strategically left the door open to carry out compliance activity however they see fit.
Taxman to clamp down on deliberate non-compliance
The tax office intends to “challenge deliberately non-compliant customers”, stating that businesses who knowingly abuse the rules risk prosecution.
While action speaks louder than words, this is a welcome development, given concerns remain that some businesses – albeit a minority – are placing all contractors inside IR35 irrespective of whether their engagement belongs there.
Tax avoidance schemes to face scrutiny
As we draw nearer to the roll out of IR35 reform, the number of non-compliant umbrella companies and disguised remuneration schemes look to be on the rise. These tax avoidance schemes promise unrealistic take home percentages and pay contractors in complex ways, often in loans or via offshore accounts.
In a positive move, HMRC have said they will “take action” and “challenge” these non-compliant arrangements, which pose a risk to contractors, recruitment agencies and end clients.
Specialist IR35 compliance team appointed
To support HMRC’s efforts, an IR35 compliance team is to be formed. According to the document, these tax inspectors will help businesses successfully implement the reform and, when needed, intervene and prevent non-compliance.
Appointing a dedicated team whose responsibility it is to police IR35 compliance suggests that HMRC will pay close attention to the ways in which businesses manage reform.
In conclusion, while the tax office has offered some clarity regarding plans for compliance in the private sector, the seemingly collaborative and supportive approach outlined by HMRC must not distract businesses from doing everything they can to ensure their IR35 compliance before 6th April.
Qdos is supporting over 2,200 businesses, helping them navigate changes to the off-payroll working rules. The Qdos Status Review facility provides a range of expert IR35 solutions, including IR35 status reviews and IR35 insurance, to allow businesses to compliantly place and engage contract workers. For more information, please get in touch on firstname.lastname@example.org or 0116 478 3390.