HMRC begins IR35 compliance activity following IR35 reform

Oil and gas, banking and financial services companies receive letters from the taxman

HMRC has started carrying out its first IR35 compliance checks among businesses, six months after the introduction of IR35 reform in the private sector.

Several publications have reported that a number of oil and gas companies, banking and financial services businesses have been targeted by the taxman, who has issued these organisations with letters regarding their IR35 compliance.

The letters have been sent by an officer of HMRC’s specialist off-payroll working team and ask to understand the recipient’s process for engaging contractors, including:

• Whether contractors are engaged directly or via an agency
• How IR35 status determinations are carried out
  
  

They may, as the article originally published in ICAEW points out, resemble the template letter that was published by HMRC soon after an IR35 forum meeting. This can be found here.
 

Are these businesses under investigation?

As things stand, these businesses are not being officially investigated. However, caution is certainly urged. HMRC is on a fact-finding mission, keen to learn more about how a business is managing IR35 reform before it weighs up its next move. This may or may not result in an IR35 investigation.

With this in mind, all correspondence received by businesses from HMRC should be handled carefully. After all, any information provided to the taxman could be used as evidence.

HMRC’s ‘soft landing’ promise a red herring

When news broke of these letters, many businesses impacted by IR35 reform have been left confused. This is because HMRC promised a ‘soft landing’ to off-payroll reform where, for the first 12 months, businesses would not be hit with penalties for applying the rules incorrectly.

However, it should be reiterated that penalties are not the same as tax liabilities, which HMRC will continue to issue. Historically, the tax owed for non-compliance in IR35 cases is much larger than penalties handed out. The £33.5m bill – of which £4m was a penalty – received by the Home Office in 2020/21 is evidence of this.

Taking this into account, and as we have regularly stressed, the 12 month ‘soft landing’ – which ends on 6th April 2022 – is a red herring and businesses should continue to ensure their compliance and protect themselves from IR35.

HMRC have already signalled intent

That HMRC has started to police compliance comes as no real surprise, particularly if you take recent developments in the public sector into account.

In a matter of weeks, it came to light that the Department for Work and Pensions (DwP), HM Courts and Tribunal Service and, as highlighted above, the Home Office, had all been hit with multi million pound IR35 bills. These amounted to £87.9m, £12.5m and £33.5m respectively.

How can businesses manage IR35 reform?

There are a number of considerations and processes for businesses to follow to help ensure their compliance. You can learn about how to manage IR35 reform here.

At a glance, here are some important pointers:

• Do not rely on HMRC’s IR35 tool, CEST
• Carry out rigorous IR35 assessments with ‘reasonable care’
• Avoid blanket IR35 decisions and contractor bans
• Mitigate the risk of outside IR35 engagements with insurance

What to do if you receive a letter from HMRC

Businesses should take these letters seriously, given any response could either shut down an IR35 enquiry in its tracks or lead to an investigation. On the face of it they may seem like innocent checks, with HMRC requesting relatively straightforward information, but it’s important that replies are handled with care and preferably, by an expert. Inaccurate information could result in HMRC launching an IR35 enquiry, which can be a long, complicated and, without IR35 insurance in place, expensive ordeal.

Qdos supports over 2,800 organisations with their IR35 compliance through a range of services including IR35 Audits that help to assess processes and ensure complete compliance. To learn more about how we can help you manage IR35 reform, please email [email protected] or call 0116 478 3390.