I’ve written many articles recently about my views on the Off-payroll working reforms introduced into the private sector in April 2021.

Many have focused on remaining compliant and ensuring that you minimise your risk as an engager or supplier of contingent labour.

I’ve followed the actions of HMRC closely since the introduction and have given regular updates based on actual meetings and interviews between engagers and HMRC.

All of which can be found on our blog page at: https://workrgroup.com/resources/blog/

However, the most concerning thing for me is the idea that the reforms may just be a distraction, rolled out by the government in the manner of a trojan horse.

I’ve alluded to this already in previous articles (Legislation, legislation, legislation). Still, the reality that HMRC may use the reforms to exercise other legislation appears one step closer.

Senior HMRC representative confirms Criminal Finances Act focus and investigations

According to a recent article by Osborne Clark, legal experts in the UK workforce solutions sector, HMRC is already conducting risk reviews with some of the UK’s largest businesses.

With HMRC continually touting the umbrella sector as a high-risk area for tax evasion, its focus appears to be on the UK’s temporary labour supply chain.

Under the Criminal Finances Act 2017 (CFA), law enforcement agencies such as HMRC can investigate and, where applicable, prosecute businesses that fail to prevent those who act for or on their behalf from criminally facilitating tax evasion.

The article highlights two key points:

1. HMRC is now visiting large businesses (the top 2,000 in the UK) to check, as part of the normal pattern of HMRC risk reviews, what prevention procedures they have in place to police their supply chains.
2. HMRC has 14 live investigations under the CFA and is looking at 40 “opportunities” to use the legislation.

Having already supported clients with enquiries following the introduction of the Off-payroll working reforms, I know that the original requests for information (RFI’s) included a demand for details of suppliers, including umbrella companies.

Herein lies the basis of my theory.

Now fully armed with the information gathered from the Off-payroll working reforms RFI, will HMRC forego its opportunity to challenge individual IR35 status determinations?

Instead, will HMRC use the CFA to address potential tax evasion in the umbrella sector? 

Blanket statements play into the hands of HMRC

Market analysis has indicated a significant migration of contractors to umbrella companies post-Off-payroll working reforms. This was mainly due to engagers making blanket decisions to avoid IR35.

However, this swell to an already significant population of temporary workers under umbrella models has only served to coral more contractors under HMRC’s microscope.

With investigations already underway, the threat of the CFA is now genuine for those businesses that engage contractors via a supply chain.

I urge anyone concerned about their temporary labour supply chain compliance to get in touch. Andy Webster, Founder and Director, Workr Compliance, on 07827 810851 or at aw@workrgroup.com.

Much has been written about the Off-payroll legislation reforms over the past 18 months. It is the most significant legislative change to affect the UK labour supply chain in recent times, after all.

Unfortunately, it’s not the only legislation that end clients and recruitment suppliers need to consider when it comes to compliance and risk.

Tax avoidance has been a focal point for the treasury for several years. Successive governments have slowly but surely tailored legislation to help their fight against tax evasion.

In doing so, HMRC has been at the forefront of this fight, with a keen eye on the UK’s temporary labour market.

The changes to the IR35 legislation are a prime example. However, other pieces of legislation present an equal, if not a higher, risk to those involved in the supply and engagement of freelancers and temporary labour in the UK.

The Criminal Finances Act (2017)

The criminal finances act (2017) gives law enforcement agencies and partners capabilities and powers to recover the proceeds of crime, tackle money laundering, tax evasion and corruption, and combat the financing of terrorism.

The governments’ guide to tackling tax evasion states in its aim for the legislation that “relevant bodies should be criminally liable where they fail to prevent those who act for, or on their behalf from criminally facilitating tax evasion.” Those who act for or on behalf are defined as an “associated person”.

Previously, legislation had stipulated that senior members of an organisation had to be proven to be aware of or involved in the illegal activities. However, it was felt that this was almost an incentive for senior members to turn a blind eye in order to claim ignorance and protect the organisation.

The current criminal finances act removes the need to prove awareness and puts the onus firmly upon business owners and leaders to do their due diligence. 

Having already identified a high number of tax evasion schemes within the umbrella sector, it’s clear that HMRC already has a focus on the sector. It also now has the legislation in place to support enforcement.

The criminal finances act (2017) demands due diligence

The consensus within the UK temporary labour market is that an “associated person” within the supply chain would include recruitment agencies and umbrella companies in a case of law.

For Directors and business owners, whether they be engagers or suppliers of temporary labour, the risk of association or complicity to tax evasion has become far higher due to the criminal finances act (2017). With unlimited financial penalties resulting from a conviction, the price is likely to be high.

In the wake of the IR35 reforms, analysis and insight have suggested a corralling of contractors to umbrella models.

Our response is how many Directors and Board members are confident enough of their due diligence to identify and prevent tax evasion within their supply chain?

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.

The extension of the off-payroll reforms into the private sector took effect in April 2021. Almost 12 months in, have engagers (end clients) got to grips with IR35 and their new responsibilities?

The IR35 reforms saw responsibility for defining whether an assignment is inside or outside of IR35 change from contractor to engager. The potential liability for incorrect or unpaid taxes and penalties came with that change. Recent case studies from the public sector have shown how substantial those taxes and penalties can be.

Therefore, it might be reasonable to think that engagers of personal service company (PSC) contractors would have addressed their IR35 responsibilities.

Since HMRC implemented the reforms, we’ve talked to engagers and contractors alike. Whilst some businesses appear to have met IR35 head-on and are prospering, we are still seeing and hearing of many worrying instances where the IR35 reforms have not been adequately addressed.

Are clients meeting their IR35 responsibilities?

The initial response to the IR35 reforms from many engagers was to take a blanket approach and define all contractors as inside IR35. This response stimulated a mass migration to PAYE solutions via an agency or umbrella company.

However, our previous blog, IR35 – The importance of supply chain compliance, highlighted the risks associated with such an approach.

Of more concern are the engagers we have heard about or spoken with who have not taken action.

We still hear of engagers relying on outsourced processes (along with responsibility and liability) as their defence. Others claim to have indemnity clauses passing on responsibility and liability for non-compliance.

In our experience of the initial enquiries conducted by HMRC, such approaches will not meet requirements.

According to HMRC, engagers must take reasonable care and responsibility for ensuring that status determinations are accurately assessed. Failure to demonstrate a robust and compliant process is unlikely to meet reasonable care requirements. Claiming diminished responsibility due to outsourcing is even less likely to appease HMRC.

Reliance on indemnity clauses is also an extremely risky tactic, with many such clauses being unenforceable according to previous case law.

Workr recommendations

Initial HMRC enquiries have focussed on engagers providing evidence of their IR35 status determination processes.

In our opinion, this is a clear indication of HMRC’s expectations concerning reasonable care requirements.

At a minimum, whether you have sought outsourced support or not, Workr recommends defining and documenting a process for each status determination you make. This process and each determination should be reviewed regularly to ensure fitness for purpose and accuracy.

We also recommend a detailed review of all contracts in the supply chain. Although your legal advisors may insist on inclusion, a robust and compliant process should remove the need to include indemnity clauses.

A review of contracts in the supply chain should ensure that clauses in all contracts down the supply chain are consistent and do not contradict each other. This is especially important with regard to key IR35 tests such as the right of substitution and mutuality of obligation.

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.

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.

Before the Off-payroll reform legislation was introduced into the private sector in April 2021, much of the focus was on the new responsibilities of the engager.

Understandably, such a significant change to the legislation was likely to grab the headlines. However, the significance of the change may well have distracted attention away from other, equally important areas of the legislation.

The reforms saw the definition of whether an assignment is inside or outside of IR35 change from contractor to engager. Along with that change in responsibility came the potential liability for incorrect or unpaid taxes and penalties.

The response from many engagers was to take a blanket approach and define all contractors as inside IR35 encouraging migration to PAYE solutions, either via an agency or umbrella company.

However, these actions may not be the get-out that engagers felt they might be. With a plethora of other legislation at HMRC’s disposal, are the off-payroll reforms just a trojan horse strategy that will allow HMRC to expose non-compliance in the broader supply chain?

What should supply chain compliance include?

Before the reforms took effect, there was a lot of reliance on contract terms and conditions, delegating responsibility and liability to those further down the supply chain.

In many instances, engagers out-sourced supply and compliance to a managed service provider (MSP), including indemnity clauses passing on responsibility and liability for non-compliance.

However, this approach may not be quite as risk-free as it appears.

In its original guidance notes (Employment Status Manual, esm10014), HMRC encouraged the involvement of professional advisors and support in the determination process. However, they also clearly stated that simply outsourcing the determination process would not relieve the engager of responsibility or liability and may not be deemed as taking reasonable care.

Recent case law (Udlaw Limited v Revenue and Customs, 27/01/2020) also referred to the HMRC Compliance Handbook – CH84540 concerning reasonable care. Referring to the manual, it stated;

A person cannot simply appoint an agent and deny responsibility for their tax affairs. The person has to show that they took reasonable care, within their ability and competence, to avoid default by their agent.

Therefore, supply chain compliance must include an element of due diligence where the engager can demonstrate that it has gone to reasonable lengths to ensure that all parties within the supply chain operate legally and compliantly.

Due diligence should include regular audits and reviews and a requirement for regular data and reports to support the financial trail created by the contingent labour engagements, particularly those related to taxes.

What are the risks of non-compliance?

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. This is the direct threat to engagers following the introduction of the reforms.

However, if we consider our trojan horse theory, HMRC has several other pieces of legislation at its disposal. The criminal finances act and managed service company legislation immediately spring to mind.

If HMRC uses the off-payroll reform legislation as a route to investigating the broader supply chain, it would be advisable for engagers to prepare in advance.

Financial malpractice and tax avoidance in the supply chain could easily see engagers deemed complicit with financial penalties and even jail sentences for Directors.

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.

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.

The off-payroll reforms have received a great deal of air time over the past 18 months, and you’d be forgiven for growing tired of all that IR35 talk. Add to this all of the other distractions such as Christmas, Omicron and party politics (literally), and it’s easy to understand why there has been a lull in all things off-payroll reform.

However, our advice to anyone involved with temporary labour, IR35, and compliance is don’t get complacent.

Whilst we have all been taking a festive break or trying to avoid Omicron, working from home or returning to the office, HMRC has been diligently working away in the background.

Whether it’s been declaring the results of investigations into public sector bodies (see our previous article) or kicking off investigations into private sector engagers, IR35 certainly hasn’t gone away.

IR35 investigations, the lull before the storm

Working closely with several high volume contract end-users throughout 2021, we have gained first-hand experience of HMRC’s commitment to this legislation.

As of 06/04/21, if you haven’t been managing your PSC’s and ensuring that they have a clearly defined status determination, then our advice would be to buckle up.

It’s taken HMRC almost four years to conclude some of their investigations into public sector organisations. The results, however, published over the last six months or so, are enough to make anyone sit up and take note. With a combined tax bill of approximately £250M, the recent publication of these results is surely not down to coincidence.

However, it’s unlikely that it’s going to take HMRC quite as long to get its teeth into the private sector.

Indeed, investigations are already well underway, with HMRC sending RFI letters to engagers from several industries. In many cases, HMRC has followed this up with in-depth and challenging meetings and interviews – we’ve supported clients that have had as many as three already.

So, whilst there may well have been a lull and some IR35 lethargy in recent months, now is a great time to refocus and ensure that your IR35 processes are fit for purpose and compliant.

Looking beyond the SDS 

The best piece of advice that we can offer based on our experiences with HMRC so far is to think well beyond the SDS (Status determination statement).

Initial RFIs focussed on processes, documentation and systems used to make status determinations, including whether the government’s own CEST tool had been used.

Additionally, questioning around alternative determination systems has been far more detailed, including the weighting used for individual questions.

As anticipated, HMRC has looked at the content of contracts down the supply chain. In particular, looking at the consistency of contract terms and the application of these terms in the working environment.

This questioning has also expanded beyond the engager to all of the stakeholders in the process and, we would argue, outside the legislation’s scope. Irrespective, the direction and focus of these initial enquiries demonstrate that HMRC is looking more broadly and deeply than some would have anticipated.

In our opinion, end users will likely have to demonstrate their responsibility for their supply chain. In other words, it won’t be enough just to say we didn’t know.

End users will be well advised to ensure that they understand and control what happens beyond their boundaries when it comes to contractors. 

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.

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.

It’s fair to say that the lead-up to introducing the Off-payroll reforms to the private sector was anything but smooth.

When the Off-payroll reforms were introduced into the private sector in April 2021, two full years had passed since the government confirmed its intentions to introduce the reforms. The private sector had also benefited from witnessing the introduction of the reforms into the public sector back in 2017.

The pandemic forced many businesses into emergency or survival mode. Even though the government deferred the introduction of the reforms for twelve months, engagers could be forgiven for not being entirely focused on IR35.

Under normal circumstances, most people would argue that four years (2017 – 2021) is ample time to prepare for any form of change.

However, these were not normal circumstances, and IR35 has wallowed in ambiguity and controversy since its original introduction many years ago. Preparation, therefore, was unlikely to be straightforward.

Public sector investigations set the tone

In our previous article – 2021, A year of reform, we reviewed our experiences and findings following the introduction of the reforms to the private sector.

The findings were mixed, with some engagers exceptionally well prepared and others completely oblivious.

Irrespective of our findings, the one thing that has become clear since the introduction is HMRC’s commitment to the off-payroll reforms.

Even though the reforms were introduced to the public sector back in 2017, there were very few cases to base judgment or opinion on what HMRC would classify as good, bad, right or wrong.

Again, another reason for engagers to be confused or cautious about what actions to take. 

However, following the introduction of the reforms to the private sector, whether by strategy or coincidence, HMRC began to publish the results of investigations into some high profile public sector bodies.

The results were difficult to ignore.

The DWP, Home Office and the Ministry of Justice were all found wanting following IR35 investigations with eye-watering tax bills of £87.9M, £33.5M and £72M, respectively.

HMRC have subsequently followed that up with the results of an investigation into Defra, the government department responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities. 

The result of Defra incorrectly determining contractors as outside IR35 in the eyes of HMRC was another hefty tax bill. This time a whopping £48M.

What does 2022 hold for IR35 in the private sector?

If these public sector examples are anything to go by, private sector businesses need to heed these ominous warnings.

Even though the government confirmed a soft introduction, promising no fines or penalties on genuine errors for the first twelve months of the legislation, this period is now almost over.

Having already gone through the IR35 investigation process with public sector organisations, HMRC is guaranteed to use the lessons learned when turning its attention to the private sector.

Initial requests for information and interviews with private sector businesses have demonstrated HMRC’s keen interest in the systems used to make status determinations, including the weighting of questions used to achieve a result. This is particularly interesting considering that the public sector organisations punished for making incorrect determinations all used the government’s own CEST status determination tool.

Additionally, HMRC questions have intimated that the scope of investigations may expand into the broader supply chain rather than focusing solely on status determinations.

Therefore, care and compliance must prevail in 2022 for private sector businesses to meet the demands of the off-payroll reforms.

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.

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.

In what has been a turbulent and unpredictable year, we can all be forgiven for moments of uncertainty.

However, when it came to the Off-payroll reforms, finally introduced into the private sector in April, there was an unerring certainty about HMRC’s actions.

Amid calls for a further deferral or even a complete u-turn and retraction of the reforms, HMRC remained steadfast in its determination to push through the legislation, albeit with a soft introduction.

The overall consensus was that engagers, contractors, agencies and all of those businesses within the temporary labour supply chain had received the benefit of an extra twelve months to prepare for the changes.

Although some would reasonably argue that the pandemic had distracted preparations and taken priority, the calls fell on deaf ears, and the legislation came into effect on the 6th of April.

So what have we learned?

What have we learned?

In the nine months since the introduction of the reforms, we’ve heard many stories, thoughts and ideas around how best to respond to the IR35 legislation changes. In many cases, engagers have taken an ultra-cautious approach with their new responsibilities and liability.

Umbrella companies have stepped up their pitch to promote their offering as an IR35-free solution, and contractors have had to make career and lifestyle choices that were often unwelcome or unwanted.

These reactions were not entirely unexpected, but perhaps the biggest surprise has been the number of stories and examples of businesses that remain unprepared or uncertain about the legislation.

The government confirmed a soft introduction, promising no fines or penalties on genuine errors for the first twelve months of the legislation, perhaps giving engagers a sense of security and a safety net from which to preach ignorance.

However, the critical point of the soft landing is the reference to genuine errors. Given HMRC’s guidance notes on responsibility and reasonable care, genuine errors appear quite a narrow channel that leaves a lot of other areas open to challenge.

Engagers who have made blanket statements or outsourced determination processes to avoid IR35 liability should seriously reconsider their actions to ensure they have genuinely mitigated any risk.

The soft landing is unlikely to stretch as far as protecting against complacency or ignorance.

Furthermore, we have learned more recently of HMRC’s post-reform requests for information. While the requests initially focused on determination processes, compliance and contractor numbers, subsequent interviews have led us to believe that examining the broader supply chain is highly likely.

This would likely include agencies and umbrella companies, meaning that engagers could be held responsible or deemed complicit if tax avoidance schemes are unearthed within the supply chain.

With a plethora of other tax legislation at its disposal, the Off-payroll legislation could just be a Trojan horse that HMRC will use to assess the broader temporary labour supply chain. This is particularly relevant to engagers that have forced contractors down the umbrella route.

What next? IR35 in 2022 and beyond

Compliance and care must be the keywords for engagers as we approach 2022 and beyond.

Based on the direction of HMRC’s post-reform investigations, we strongly recommend that supply chain management and due diligence become an integrated part of engagers BAU for 2022 thereon.

Given the economic impact of the pandemic over the last two years, tax avoidance is undoubtedly going to be high on the government’s agenda.

Moving contractors to umbrella models purely to avoid the Off-payroll legislation may, in hindsight, appear to be a jump from the frying pan straight into the fire.

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.

For another angle on our sector in 2021, we asked Group CEO Matt Tyson to walk us through the year and highlight some of his stand-out moments, you can read that here.

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.

Following Workr’s recent articles about HMRC’s post-reform activities, it’s been interesting to observe that much of the information requested in HMRC letters and interviews has centred around those involved in the supply chain.

In particular, HMRC appears to be focusing much of its attention on the recruitment suppliers used to source contractors and the umbrella companies used to engage them. 

Having kept a close eye on recent proceedings and spoken with businesses that have already conducted post-reform meetings and interviews with HMRC, it’s fair to say that HMRC’s questioning has been more extensive than expected.

The consensus following these meetings (some businesses have already had more than one) is that HMRC is looking well beyond the scope of the Off-payroll reforms in its investigations.

HMRC appears to be looking at the whole supply chain if its questioning and investigations are anything to go by. Requests for records of recruitment suppliers and umbrella companies have not been uncommon.

These requests lead me to believe that HMRC is looking to assess the bigger picture rather than focussing purely on the status determination process.

Are engagers responsible for their supply chain?

In the context of the Off-payroll reforms, there are two main changes in responsibility for engagers:

1. Conducting and communicating the status determination for each contract assignment.
2. Meeting Reasonable Care tests, as defined by HMRC. 

Upon completion and confirmation of the status determination, the responsibility for the payment of taxes etc., falls to the payee, which in most cases is the recruitment agency or umbrella company, depending on the status result.

The legislation contains little reference to the supply chain or responsibility for its management.

Why, then, is HMRC following this route of questioning?

If the early market indicators are correct and many PSC contractors have transferred to umbrella models or employment contracts, it would make sense to me that HMRC prioritises following that money trail over anything else. This is, after all, where HMRC is likely to generate its quickest wins and the majority of its revenue.

However, HMRC has a plethora of tax evasion legislation that it can use for enforcement purposes. I, therefore, believe that there is a real risk of engagers being held responsible or deemed complicit for the actions of those within its supply chain should future HMRC investigations unearth problems.

What are the risks of not managing your supply chain?

Based on the direction of HMRC’s initial post-reform investigations, it appears that supply chain management and due diligence could well be defined as being a part of the engagers reasonable care and compliance responsibilities.

In its reasonable care guidance notes, HMRC advised engagers to seek the advice and support of qualified and professional advisors, but this was as far as the advice went. Therefore, the  Off-payroll legislation contained little for engagers to fear in relation to its supply chain management.

However, given the focus that HMRC has put on the supply chain during its recent investigations, my advice to engagers is to beware.

The Criminal Finances Act is an alternative piece of legislation that HMRC has used previously and could use again in its fight against tax avoidance. There have been several cases of umbrella providers being found guilty of peddling illegal tax avoidance schemes in recent times.

Engagers found to have such umbrella companies in their supply chain could well find themselves under investigation for being complicit in promoting such schemes.

Therefore, the need for supply chain management and due diligence is essential to prove reasonable care and will go a long way to reducing any risk of complicity.

If you have concerns about meeting the requirements of the off-payroll legislation or supply chain compliance, then Workr Compliance can help.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.