IR35 compliance checks: are your ducks in a row?

With effect from April 2021 the new IR35 rules apply to large and medium sized businesses in the private sector who engage contractors. These businesses are required to determine whether those contractors who are supplying their labour via their own intermediaries would be an employee if hired directly by the business. If the business determines that the contractor is a disguised employee and so IR35 applies, the entity which has the direct contractual relationship with the contactor’s intermediary must operate PAYE and National Insurance Contributions (NICs) on the fees it pays to the intermediary. Contractors who are supplying a fully outsourced service to the business rather than labour are not caught by IR35.

We understand that HMRC began writing this month to businesses in the financial services and oil and gas sectors asking them to arrange a telephone call with HMRC as the first step in a compliance review. For those businesses which engage contractors, HMRC organises a follow up meeting to ensure that the business has implemented IR35 properly.

HMRC appear to be focusing their review on the business’s procedures for:

• engaging contractors;
  
  
• determining whether a contractor is providing labour or services; and
  
  
• determining whether those contractors who are providing labour are disguised employees - in particular whether the business is using reasonable care in determining the status of its contractors.

If HMRC identifies any errors or weaknesses in procedures, they will work with the business to ensure IR35 is being implemented correctly. If the business has made errors in operating IR35, they will need to pay the arrears of tax and employee and employer NICs together with interest.

Recognising that businesses faced an additional burden to ensure compliance with IR35, HMRC previously indicated in Employment Status Manual ESM10036 that it would be “supportive”, which would include adopting a “light-touch” approach to penalties for IR35 errors in the tax year 2021-22 unless there was evidence of deliberate non-compliance.

However, as the latest HMRC activity demonstrates, this supportive approach does not exclude HMRC from seeking to ensure that businesses are implementing IR35 rules properly, that any errors are corrected, and that any deliberate non-compliance is challenged. HMRC are also making it clear that penalties will be charged unless businesses have sought to comply with IR35 and also co-operate fully with HMRC including disclosing any errors.

Although HMRC have started their review in the financial services and oil and gas sectors, other sectors are likely to face IR35 compliance reviews soon. Before the HMRC review letter arrives, businesses should ensure that their IR35 procedures are robust. Any business that has ignored IR35 should comply as a matter of urgency.

If you need help with IR35, please contact our specialist team IR35@lewissilkin.com