Tag: IR35

HMRC’s latest IR35 campaign

Posted on by Alicia Sprott

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.

HMRC pauses off-payroll worker reviews pending consultation outcome

Posted on by Alicia Sprott

We are aware of concerning HMRC’s approach to ongoing off-payroll worker reviews and the possibility to offset any taxes. This has seen HMRC contacting taxpayers, who are currently undergoing an employer compliance review, to delay settlement of cases pending the outcome of a consultation process (now closed).

We understand that a decision on how to proceed with any new legislation has not yet been decided upon. It is expected that any new legislation will come into effect from April 2024, but we may hear more on 22 November 2023, the date of the Autumn Statement. However, the proposed set-off arrangements may help those who are faced with significant liabilities.

We are aware that HMRC has paused current reviews where the amount of tax due has been determined, and where:

  • The taxpayer has acknowledged in writing an error in applying the off-payroll worker rules; and
  • The deemed employer’s gross liabilities have been agreed (including any penalties which will form part of the settlement).

In addition, HMRC will require details of the personal service company (PSC) and the worker’s full name and National Insurance number to be able to verify any tax and NICs which could be available for set-off.

If you have any questions concerning how you manage your off-payroll worker arrangements, or settle any historic liabilities with HMRC, please contact a member of our Employment Taxes team.

IR35: Is HMRC operating a blanket ban on contractors?

Posted on by Alicia Sprott

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.

Gary Lineker and IR35: Accountancy Daily

Posted on by Alicia Sprott

The story so far

HMRC claimed that Lineker had an amount of £4.9m in unpaid tax from income generated between 2013 and 2018. In an usual move, HMRC claimed that IR35 applied to the partnership Lineker and his ex-wife had in place.

Lineker appealed against HMRC and won his appeal earlier this year at the First Tier Tax Tribunal (FTT). The FTT found that the IR35 legislation did not apply since the contracts were entered into directly with BBC and BT Sport, and not via an intermediary.

Now that HMRC is taking the FTT’s decision to the Upper Tier Tribunal (UTT), it opens up questions about IR35 and the cases in which it can be applied.

Nick Bustin says: “The case magnifies the challenges for those who are responsible for considering the intermediaries legislation, such as medium/large businesses, public sector bodies or workers who are contracted to provide their services to a small business.”

Riocard Hoye adds: “HMRC will be committing lots of resource with the aim of getting the decision overturned by the UTT, to avoid setting a precarious precedent for future tax cases which consider the intermediaries legislation.”

You can read Nick and Riocard’s article in full via Accountancy Daily (subscription needed).

What to do if you think IR35 affects you

Whilst there is still uncertainty around IR35 and its application, the important thing is to remain compliant. Get in touch with our Employment Tax team or our Tax Disputes & Resolutions team to understand how IR35 may affect you and your business.

 

Eamonn Holmes loses Upper Tax Tribunal appeal over IR35 ruling

Posted on by Alicia Sprott

Within just one week, there have been two judgements relating to the application of the intermediaries legislation (commonly referred to as IR35) involving high profile personalities – Gary Lineker and Eamonn Holmes. It should be noted that while both appeals dealt with IR35, only Mr Holmes’ case reviewed the employment relationship between him and ITV.

Mr Lineker’s appeal was successful due to a technical argument that he contracted directly with BBC and BT, rather than through his partnership vehicle, so IR35 does not apply. His working relationship with either organization was not further reviewed.

Upper Tribunal ruling

In its decision, published on 29 March 2023, the Upper Tribunal confirmed that Mr Holmes’ work for ITV was within IR35. During the pre-April 2021 period, the responsibility to operate Pay As You Earn (PAYE) was with his Personal Services Company (PSC), not ITV.

This judgement can be better understood by looking at why IR35 was introduced, and what criteria must be met for it to be applicable.

Background

People working via a PSC, especially IT workers, was prevalent during the 1990s. PSC structures provided Income Tax and National Insurance (NI) benefits. However, HMRC were becoming increasingly concerned that if the PSC was removed, the working relationship between the end user/engager and the worker was one of employment.

The IR35 legislation was introduced in 2000 with the stated goal of requiring workers to pay the same amount of Income Tax and NI as employees, regardless of the structure in place. It was up to the PSC/intermediary to review the contractual terms of the engagement and determine whether the contract fell within (employment) or outside (self-employment) of IR35. If the contract falls within IR35, the PSC was required to operate PAYE.

In 2017 and 2001, changes were introduced to the legislation for public entities and the private sector respectively, which meant the responsibility for the employment status review was transferred from the PSC to the end client. If the contract falls within IR35, the fee payer (the entity that contacts the PSC) must operate PAYE. There is currently an exemption for small employers in the private sector, where responsibility for the review and if applicable, operation of PAYE still sits with the PSC and not the small end client

Legislation

The key provisions are set out in Section 49 Income Tax (Earnings & Pensions) Act (ITEPA) 2003:

  1. This chapter applies where:

(a) An individual (‘the worker’) personally performs, or is under an obligation personally to perform, services for another person (‘the client’),

(b) The services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (‘the Intermediary’), and

(c) The circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for Income Tax and NI as an employee of the client.

In IR35 cases, (a) and (b) are given and it is (c) that is debated in the courts. However, in Mr Lineker’s case, the Judge opined that the contracts were directly between Mr Lineker and the BBC/BT, and not involving a third party. Consequently, IR35 does not apply.

Holmes’ case

The case was first heard in June 2018 and the current appeal was to decide whether Mr Holmes’ contract with ITV, for the period 2011/12 and 2014/15, was inside or outside IR35. There is a set process which is followed in any IR35/employment status review and this is to:

  • Review the contractual terms of the engagement.
  • Determine how the worker and the client work this contract in practice.
  • Form a hypothetical contract of the actual working terms.
  • Subject the hypothetical contract to the employment status indicators established by case law to determine if the contract is an employment or self-employed contract.

The employment status factors include:

  • Control – what, when, where and how the task is performed
  • Provision of personal service – for example, does the worker have to perform the task himself or can he use a substitute?
  • Mutuality of obligation – does the client have to offer the work, and if so, does the worker have to accept the work?
  • Provision of equipment: HMRC only considers equipment to be significant when it is fundamental to the service provided and sufficiently important to affect the substance of the contract
  • Financial risk: can the worker make a profit or loss?
  • Part and parcel of the client: for example, how well is the worker integrated into the organisation?

Other factors concern the termination notice, payment of any benefits, intention of the parties, length of the contract and demonstrating a business on their own account.

Certain factors carry more weight than others, but both HMRC and the courts state that the employment status should be multifactorial. This has been emphasised again in recent cases involving, Kaye Adams, Adrian Childs and Stuart Barnes.

Factors that determined the Upper Tribunal’s ruling

The three limbs of the Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2QB497 case were satisfied, since there was sufficient framework of control exercised by ITV, there was mutuality of obligation and Mr Holmes had to personally provide his services.

In contrast to recent cases cited above, where being in business on one’s own account carried the most weight, the Judges in Holmes’ case opined that ‘it may seem that Mr Holmes’ work for several organisations points to him being in business on his own account, i.e. self-employed in all of his work. However, the case law clearly establishes that an individual may be considered under several contracts of employment, each accounting for a different period of his or her working week and be self-employed for other contracts.’

Takeaways from the Lineker and Holmes cases

  • HMRC struggles to understand its own legislation.
  • The Judges seem to make different decisions based on similar circumstances.
  • It is important to keep up with case law.

The above and recent cases demonstrate that it is imperative to have robust processes, controls, and governance in place to ensure correct employment status of your off-payroll workers.

Please contact the employment taxes team should you have any questions.

 

 

 

IR35 legislation: Gary Lineker wins tax appeal

Posted on by Alicia Sprott

The amount of Income Tax and National Insurance at stake was in the region of £4.9m, so not an insignificant sum.  Unlike most IR35 cases, HMRC pursued their claim that the ‘intermediaries legislation’, often referred to as IR35 legislation, applied to the partnership which was in place between Lineker and his ex-wife, Danielle Bux. In February 2013, both signed an agreement for the provision of Lineker’s services as a TV presenter, mainly fronting the Match of the Day programme on the BBC. The agreement covered the period 1 July 2013 to 30 June 2016. Further agreements were later entered into by Lineker with BT Sport, under his trading name Gary Lineker Media (GLM) and a further contract with the BBC running between 2015 and 2018.

HMRC contacted GLM in April 2017, requesting details of the partnership income. It was at this stage that HMRC advised they were not enquiring into the partnership’s tax return, but instead asked whether the partnership had considered the ‘intermediaries legislation’.

HMRC raised Income Tax determinations under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 ,for the years 2014/15 and 2016/17, and National Insurance determinations under Section 8 of the Social Security Contributions Act 1999, for the years 2013/14 to 2017/18. The total liabilities being pursued totalled £4.9m.

The First Tier Tribunal found that the IR35 legislation did not apply to GLM because the contracts were entered into directly between Lineker and both the BBC and BT Sport, not via an intermediary. Consequently, HMRC’s appeal was dismissed.

However, it is expected that HMRC will appeal the decision since under IR35 legislation, an intermediary can include a limited company, partnership or individual. HMRC has 56 days to appeal to the Upper Tier Tribunal.

If you have any concerns regarding the application of the IR35 legislation, or HMRC has opened an enquiry into your arrangements,  please contact either Danielle Ford, Head of Tax Disputes, or Nick Bustin, Employment Tax Director, to discuss matters further.

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