IR35 Reforms – PSC to employee details requested

Our recent article about HMRC’s IR35 activities highlighted that Request For Information (RFI) letters had been sent by HMRC to numerous businesses across several different industry sectors.

The main focus of the RFI was for documented evidence of records, processes and systems used for the off-payroll legislation.

However, the RFI also requested details of those contractors transitioned to PAYE models (either agency payroll or Umbrella) along with details of those contractors that transitioned to permanent employees.

Whilst both of these requests pose little risk to the engager for pre-reform arrangements; they could give an insight into how HMRC will look at the responsibilities and reasonable care requirements of engagers in the future.

Why would HMRC ask for these details?

The process upon which HMRC has embarked following the introduction of the Off-payroll reforms in the private sector is definitely information focused.

The letters distributed by HMRC to private sector business clearly state that they are requests for information (RFI’s).

This is understandable as HMRC is likely to be looking to reconcile its records with information that it has previously gathered through RTI reporting etc. Understanding which contractors have converted to employment contracts should allow HMRC to then focus their attention on the remaining outside IR35 population.

In the first instance, the salaries of contractors that have converted to employees will be subject to tax and National Insurance through the PAYE scheme and would likely make these contractors a low priority.

We would assume that HMRC will be looking for trends where businesses have had significant reductions in contractor numbers or alternatively have retained significant numbers of contractors on an outside IR35 basis. Whichever is the case, the information gathered should allow HMRC to focus their attention on the areas they feel are priority.

What’s the risk to the engager of providing this information?

Prior to the Off-payroll reforms, introduced into the private sector in April 2021, the responsibility for IR35 assessment sat with the contractor and had little impact on the engager.

Upon the introduction of the reforms, HMRC made a clear statement that it would not use the opportunity to retrospectively investigate previous IR35 arrangements.

Adding these two elements together would imply that engagers have nothing to fear in terms of their arrangements with contractors prior to the reforms. Therefore, engagers should have little or no concerns over HMRC requesting information about contractors that have converted to PAYE arrangements or direct employment contracts.

What do enagers need to consider?

Perhaps the main thing that needs serious consideration in response to HMRC’s approach is the engagers compliance process, including supply chain management.

HMRC have made it clear in the lead up to the introduction of the reforms that engagers will be held responsible for taking a reasonable amount of care in the manner in which they manage the IR35 assessment process.

This is likely to mean that HMRC have an expectation of engagers to take some responsibility in the management and control of the supply chain involved in the provision of contractors.

This would probably be in the form of a level of due diligence that demonstrates that the engager has a reasonable level of information and understanding of the suppliers in the chain.

A failure to take responsibility for the supply chain and process involved in the supply of contractors and, more specifically, the taxation of the fees generated could jeopardise an engagers reasonable care argument.

Need help with your compliance process and supply chain?

If you and your business need to utilise or continue using contractors but have concerns about meeting the requirements of the off-payroll legislation, then Workr Compliance can help.

Workr Compliance can provide you with impartial advice on engaging high-calibre specialist contractors whilst effectively managing your supply chain in an efficient and compliant manner.

We can help you implement and maintain a consistent and compliant process to meet the requirements of the off-payroll legislation and minimise the risk of an HMRC investigation or incorrect assessment.

For a free, no-obligation audit and assessment of your IR35 compliance process, you can speak directly with Andy Webster, Founder and Director, Workr Compliance, on 07827 810851 or at aw@workrgroup.com.

Our staff regularly write about subjects that interest them in ways that will interest our clients. Sign up for our newsletter and receive notifications when new content is added.

IR35 changes – blanket statements uncovered

The term ‘blanket statement’ has become synonymous with a specific approach to the impending IR35 changes due on the 6th April 2021, but what constitutes a blanket approach and what are the consequences of getting it wrong?

Perceptions are that some organisations, in the automotive industry, for example, have adopted a blanket approach. However, this is neither proven nor has it been tested in a case of law.

What is clear is that a great deal of ambiguity remains amongst engagers and contractors alike!

IR35 – what does reasonable care mean? Let’s recap

In our previous article, IR35 – deferred, not defunct! Workr Group outlined the changes in responsibilities for engagers along with recommendations on how to achieve reasonable care.

The IR35 changes state that, as the engager, you must take reasonable care in how you go about making an IR35 status determination.

By reasonable care, HMRC means that you must conduct a thorough and detailed assessment of the work to be carried out by the contractor (worker). 

HMRC recommends that you:

  • Formalise and record a consistent process.
  • Seek professional advice and assistance.
  • Involve relevant parties or individuals.
  • Use a determination test tool.
  • Regularly review determinations.
  • Define and communicate a transparent process for challenges.

How does this impact engagers?

Clearly, for companies that engage contractors who provide their services through an intermediary (personal service company or PSC), the IR35 changes will increase in the time and administration required.

As a result, it would appear that some engagers have opted to conduct mass determinations to try to reduce the administrative burden. Making mass determinations for all or large groups of contractors has commonly become known as making a blanket statement.

Previously in the rail sector and more recently in the automotive industry, concerns have been raised about engagers adopting the blanket statement method.

What are the risks of making blanket statements concerning IR35?

Where the engager is deemed not to have taken reasonable care in determining the IR35 status of a contractor, HMRC can transfer any debt for unpaid taxes to the engager

According to HMRC’s Employment Status Manual (esm10014), examples of behaviours which do not constitute reasonable care include, but are not limited to:

  • Determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.
  • Determining that the off-payroll working rules apply to a large group of workers who have some variations between the work that is being carried out, without giving proper consideration to the different working arrangements for each worker.

If therefore, making blanket statements does not constitute reasonable care, then the implications and risk for engagers are significantly increased.

In the UK automotive sector, for example, some companies engage hundreds, if not thousands of contractors meaning failure to take reasonable care could represent a substantial financial risk.

Additionally, the time saved by making blanket statements is likely to be expended many times over as a result of the high volume of challenges made by contractors in response.

IR35 – does outsourcing the determination process constitute reasonable care?

In the guidelines outlined above, HMRC encourages the involvement of professional advisors in the determination process.

Engagers who utilise such support will be demonstrating a commitment to making fair and reasonable determinations and will likely be looked upon favourably by HMRC and contractors alike.

However, this approach comes with a caveat!

Simply outsourcing the determination process to another party does not relieve the engager of responsibility or liability and may not be deemed as taking reasonable care.

In recent case law; Udlaw Limited v Revenue and Customs (27/01/2020), the tribunal referred to the HMRC Compliance Handbook – CH84540 concerning reasonable care.

The manual states;

A person cannot simply appoint an agent and deny responsibility for their tax affairs. The person still has a duty to take reasonable care, within their ability and competence, to make sure that what they are signing for is correct. The person has to show that they took reasonable care, within their ability and competence, to avoid default by their agent. This will include:

  • Making sure that they give the agent all relevant information with which to work. No agent, for example, can produce correct accounts and returns from grossly deficient records, or give accurate advice if they do not have all the facts.
  • Implementing the professional advice received and not neglecting some vital step.
  • Checking the agent’s work to the extent that the person is able to do so. For example, an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.

IR35 — what should engagers do now?

We encourage anyone with a responsibility for IR35 compliance to ensure that your determination process is fit for purpose and meets HMRC’s reasonable care requirements.

Whilst it may seem time-consuming and burdensome initially, the mitigation of risk and time saved by taking a robust, right-first-time approach will give peace of mind and confidence to all stakeholders in the process.

With the IR35 changes now less than six months away, now is the time to review your determination process!If you have found this useful, then you can find further information on IR35 here.

IR35 – deferred, not defunct!

As we entered 2020, one of the key topics on our agenda was the IR35 Off Payroll Private Sector Reforms.

The intermediaries legislation, as it is also known, had seen some controversial reforms already introduced to the public sector back in 2017. These reforms were due to make their arrival in the private sector on the 6th of April 2020.

However, as a result of the COVID pandemic and resultant lockdown measures, the Government made the decision to defer the reforms until the 6th April 2021.

Whilst the decision to defer was a great relief to many, we now find ourselves only six months away from the implementation of the reforms.

For those hoping that the legislation would be scrapped or forgotten, the reality is that the legislation is already law, although not yet enforced.

Barring any extraordinary legal or political development, the changes will take effect on the 6th of April 2021.

What is IR35? Let’s recap

IR35, also known as the Intermediaries Legislation, is tax legislation aimed at tackling tax avoidance.

The legislation is designed to test whether workers providing their services and expertise to a client via an intermediary, such as a limited company, would otherwise be an employee of the client if the intermediary did not exist.

If caught by the IR35 legislation, the earnings of “deemed employees”, as they are referred to by HMRC, are subject to income tax and National Insurance Contributions (NIC’s).

What are the IR35 reforms?

It is currently the responsibility of the worker to determine whether their assignment is caught by IR35. The worker is also responsible for paying the correct taxes dependent on their IR35 status.

The reforms, scheduled to take effect in the private sector from 6th April 2021, will see the following key changes:

  • Shift the responsibility of IR35 determination from the worker to the engager (the company utilising the worker).
  • If caught by IR35, the responsibility for the payment of income tax and NICs will also shift from the worker to the fee payer (the organisation paying the worker for their services). This could be the engager or an agency (if the worker is supplied in this manner).

Does IR35 affect my business?

If your business utilises workers who provide their services via their own limited company, either directly or via an agency, then the IR35 legislation may apply to you.

There is an exemption for small businesses who meet any two of the following three criteria:

  • Turnover – not more than £10.2 million.
  • Balance sheet total – not more than £5.1 million.
  • Number of employees – no more than 50.

Where a worker is engaged by a small business, the responsibility for determining the IR35 status, along with the payment of taxes will remain with the worker.

What should you do if IR35 applies to your business?

If your business engages workers and is not classified as a small business you will need to prepare for your new responsibilities once the reforms take effect.

The key change that you must prepare for is your new responsibility for determining the IR35 status. The legislation states that, as the engager, you must take reasonable care in how you go about making the determination.

Once you have made the determination, you will also be responsible for communicating the results of your determination to the next party in the supply chain. This must be done in the form of a Status Determination Statement (SDS).

What does reasonable care mean?

By reasonable care, HMRC means that you must conduct a thorough and detailed assessment of the work to be carried out by the worker.

This assessment must include the working conditions and terms under which the service is to be provided.

HMRC recommends that you:

  • Formalise and record a consistent Status Determination process which is regularly reviewed to ensure fitness for purpose.
  • Seek the advice and/or assistance of a qualified, professional advisor such as the Workr Group.
  • Involve people with a good understanding of the work to be conducted in the determination process.
  • HMRC recommends the use of its Check Employment Status for Tax (CEST) test although this is not mandatory. There are a number of excellent alternative tools capable of producing robust and accurate determinations. It is highly recommended that you utilise a status determination test tool wherever possible. Such tools simplify the determination process and promote consistency across tests.
  • Ensure that determinations are regularly reviewed to ensure continued accuracy and validity.
  • Ensure that new status determinations are conducted after any material changes to terms or working conditions.
  • Define and communicate a clear process for challenges against determinations.

What are the risks of not taking reasonable care?

Once the engager has issued the SDS to the fee payer, all responsibilities then pass to the fee payer.

HMRC will always approach the fee payer in the first instance when conducting an investigation with regard to whether reasonable care has been met. However, any recourse could lead HMRC to the engager.

Where the engager is deemed not to have taken reasonable care in determining the IR35 status of a worker, HMRC can transfer any debt for unpaid taxes to the engager.

The same can be said for if the engager fails to respond to any challenge made by the worker against the determination.

It is vitally important, therefore to follow the guidelines above to ensure that reasonable care is taken during the determination process.

Debts can also be transferred where the fee payer simply does not pay taxes due to HMRC.

Where there is a chain of providers (MSP’s and agencies) involved in the supply of flexible workers, engagers must ensure that they conduct rigorous and regular due diligence checks of its supply chain in order to minimise its transfer of debt risk.

What now?

We have a specialist team at Workr Group that can support you with all aspects of compliance with IR35 and your flexible workforce.