IR35 compliance – Is supply chain compliance next on HMRC’s hit-list?

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.