HMRC’s latest IR35 campaign

There were instances where engagers were taking a blanket approach and deducting PAYE and National Insurance (NI) regardless of whether the legislation applied. Further challenges included, for example:

  • Is the engager caught by the legislation?
  • Who at the engager was going to have overall responsibility for legislation?
  • What policies and procedures needed to be put in place to ensure the legislation was being applied?

To recap, a business will fall within scope of IR35 where two of the following three conditions are met:

  • Turnover exceeds £10.2m;
  • Gross assets of £5.1m plus; or
  • More than 50 employees

Many charities and NFP organisations regularly engage individuals directly on a self-employed basis and the same ‘tests’ for both IR35 and employment status need to be considered to help determine whether they can be paid ‘gross’, otherwise PAYE and Class 1 NI needs to be deducted. Examples of the tests which need to be considered include, but not limited to:

  • Mutuality of obligation: Is the school obliged to provide work to the contractor/worker?
  • Personal skills: Is the individual providing specialist skills which nobody else possess and do they have the right to provide a substitute (including the unfettered right of substitution)?
  • Reality of the engagement: HMRC will typically look at what the contracts says and compare this with how the services are provided.

The amount of questions HMRC can raise during an employment status review can be more than 100, which can prove time consuming for both the engager and the worker to deal with.

HMRC campaign letter

The current HMRC campaign is not limited to individuals who provide their services via an intermediary, such as a personal service company (PSC). It will look at any individual where the payments made are not subject to payroll deductions, such as Income Tax and NI.

What is HMRC looking for?

Based on the campaign letters we have seen to date, HMRC is requesting the following information:

  • A full list of all sub-contractors, workers and individuals who were engaged during the 2022/23 tax year.
  • Details of payments made to those individuals, sub-contractors and workers including details of the services provided.
  • Provision of sample invoices.
  • A copy of any internal guidance and/or manuals.
  • Sample contracts and time records.

The final question from HMRC concerns a description of the procedures in place for determining the employment status of the contractors/workers.

In respect of this question, HMRC wants to understand what steps businesses are taking to ensure they have fully considered the tax treatment of the payments they make, to any ‘off-payroll’ workers they may engage. This will include, for example:

  • What testing of the contractual arrangements is being carried out?
  • Is the school making use of HMRC’s Check Employment Status for Tax (CEST) tool, or any other similar software as part of its verification processes?
  • Where there is any disagreement over the tax treatment on payments made to a worker, how is that dispute resolved?
  • How often does the school review the employment status of its workers?

Even if you have not received one of HMRC’s campaign letters, the fact that HMRC has put in place a targeted campaign within the charities and not for profit sector is an indication that it believes there is a high level of non-compliance.

Updated HMRC guidance

As well as its current campaign, HMRC has recently updated all of its guidance in respect of the off-payroll working (OPW) arrangements, which covers the following points:

  • Who is responsible for operating the OPW rules?
  • How are the worker supply chains being monitored?
  • How are status determinations being made?
  • What training is being provided to ensure there is compliance with the legislation?
  • What internal guidance is in place?
  • How are the PAYE reporting obligations being discharged?

How haysmacintyre can help

We have considerable experience assisting clients with a wide range of employment tax issues, especially in relation to employment status and OPW arrangements. The following are examples of how we can help you:

  • Review your existing OPW arrangements
  • Assisting with any HMRC enquiries
  • Provide training or technical updates
  • Any ad hoc matters

If you wish to discuss matters further, please do not hesitate to contact Nick Bustin, Director of Employment Tax, or a member of the Employment Tax team.

IR35: Is HMRC operating a blanket ban on contractors?

Recently, HMRC published its 2022-23 annual accounts. This showed that HMRC engaged 1,096 temporary off-payroll workers – 89% of these workers were engaged by HMRC, 10% by its agency, the Revenue & Customs Digital Technology Services (RCDTS), and the last 1% by the Valuation Office Agency (VOA). Interestingly, 95% of workers were listed as not subject to IR35 off-payroll working (OPW) rules, while the rest were deemed to be within.

So, what conclusion can be drawn from the above data? It does seem to indicate that HMRC is adopting a blanket ban on contractors outside of IR35, something that is considered as ‘not taking reasonable care’ in determining a contractor’s employment status, according to HMRC’s own guidance.

However, HMRC has strongly refuted this by pointing to the continued use of outside contractors. This is supported by the increase in expenditure on consultancies from £1.8m to £5m. Furthermore, HMRC states that “We apply the IR35 OPW rules in the same way as we expect other organisations to, ensuring the correct tax is paid”. This is not the first time HMRC has been accused of operating a blanket ban on contractors outside of IR35. HMRC’s 2020-21 accounts showed a similarly low number of contractors engaged outside IR35 OPW.

Our comments

Aside from evidence suggesting that HMRC is not following its own guidance, the data also raises questions as to how the contractors were engaged if IR35 OPW rules did not apply in 95% of the cases. The only conclusion that can be drawn is that the contractors were engaged via an umbrella company. The umbrella company sector has long been linked to non-compliance and tax avoidance schemes, which is why there is currently a consultation on how best to regulate them. The consultation closes on 29 August 2023.

Considering the above and the legislation containing transfer of debt provisions in event of non-compliance in the supply chain, it will be interesting to see how far HMRC will accept accountability if it gets caught in a supply chain non-compliance/tax avoidance scheme.

The main takeaway from the above is that, although it can be administratively burdensome, you do not have to adopt a policy such as a blanket ban. IR35 can be managed if the company has the right processes, controls, and governance in place. This will outweigh any costs of administration, third party costs, and more.

We have a variety of services that we can offer in relation to IR35. Please contact our Employment Tax team should you have any questions.

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