HMRC’s return to PAYE compliance checks a possible route into IR35 enquiry

Ongoing PAYE compliance checks must be handled with care, given HMRC's track record

After two contractors supported by Qdos were recently contacted by HMRC, which requested information relating to a PAYE compliance check, independent workers are advised to handle such enquiries with care. This is because in the past these seemingly innocent checks have resulted in IR35 investigations. 

Following the introduction of IR35 reform in the private sector earlier this year, much was made about whether HMRC would continue to investigate the IR35 compliance of contractors, dating back to a time when they carried the liability. 

Here at Qdos, our IR35 experts were often asked if, following the liability transfer that occurred as part of IR35 reform on 6th April HMRC would only focus on compliance among businesses.  

In other words, now that businesses impacted by off-payroll changes shoulder the risk, does the threat of an IR35 enquiry and possible investigation no longer hang over contractors? 

We have outlined in an article here that this is not the case and HMRC retains the right to launch an IR35 investigation into completed contracts held before the roll out of IR35 changes - both in the public and private sectors. 

And now, after two contractors came to Qdos having received letters from the tax authority as part of a PAYE compliance check in July, based on HMRC’s past behaviour, independent workers have every reason to remain cautious. 

We’ll explain why HMRC’s recent tax compliance activity is something that contractors need to be aware of, particularly when focusing on IR35. 

PAYE compliance checks can lead to IR35 investigations

Going back as far as ten years, HMRC once regularly used a PAYE compliance check as a route into launching an IR35 investigation. 

The taxman would carry out these checks to make sure contractors were meeting their legal obligations as an employer - despite the contractor usually being the sole employee of their limited company. This would then give them the opportunity to scrutinise IR35 status. 

On the face of it, these letters sent by the tax authority seemed innocent - a request to confirm or clarify information relating to PAYE. However, given PAYE details provided to HMRC will demonstrate IR35 status, an IR35 enquiry would then follow. 

These tactics stopped abruptly around a decade ago. However, after two contractors who hold tax liability insurance with Qdos, were contacted by HMRC in July 2021 regarding their PAYE compliance, this approach is reminiscent of the one employed some time ago. 

It should be made clear that at this stage these PAYE compliance checks are yet to progress to IR35 enquiries - and may not ever. That said, given it was once a regular occurrence, it’s important that contractors realise this is a possibility. 

What if HMRC were to adopt this strategy again?

So what would it mean if these two cases - and others that may follow - were to lead to IR35 investigations in due course? 

Above all else, it would prove that the tax office is still policing IR35 compliance among contractors despite the introduction of IR35 reform earlier this year. 

As touched on before, HMRC retains the right to investigate retrospectively, focusing on contracts that took place before the liability shifted as part of the changes. 

HMRC’s IR35 reform promise is a red herring 

The time period being reviewed by HMRC in one of these cases deserves a mention. 

Given one of these enquiries spans from July 2020 to July 2021, any subsequent IR35 enquiry may include several months of IR35 reform in the private sector being in force - this was introduced on 6th April 2021. 

But while HMRC have said they will not open an IR35 enquiry using information acquired through IR35 reform (such as a contractor transferring from outside to inside IR35 due to the changes), should this PAYE compliance check evolve into an IR35 enquiry, technically the tax office would not have broken its promise.

This is because the PAYE compliance check would have been the reason for contacting the contractor, not IR35 initially. 

Expert support essential 

It’s important that contractors are aware that HMRC are once again carrying out PAYE compliance checks among one person companies - activity that could lead to an IR35 investigation, as it has previously. 

Should this occur, it’s essential that all correspondence received by HMRC is handled by a specialist, given the significant cost of non-compliance. As part of a check, HMRC will likely issue a payroll and benefits questionnaire that the tax office insists must be completed prior to a telephone interview. At this point, it’s important that contractors contact an expert.

With Qdos’ Tax Liability Cover, you have expert representation from day one of an enquiry, in addition to financial protection should HMRC find that your contract belonged inside the IR35 legislation. For further information, get in contact with a member of our team.