IR35 – The importance of supply chain compliance
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 email@example.com.