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.