Off-payroll labour and IR35 – six months on but uncertainty remains

Keeping up to date on best practice will help to minimise IR35 PAYE and NIC risks when using personal service companies (PSCs) in your supply chain.

It will shortly be six months since the IR35 reforms became effective for private sector entities, and there are many diverging views on whether the government has achieved its objective in creating a level playing field for employed and self-employed workers. But there have been some clear trends.

Marketed “solutions” – buyer beware

Despite the government’s best intentions, the introduction of the IR35 private sector reforms has seen an increase in the marketing of alternative models and so-called IR35 “solutions”, such as ‘mini-umbrella companies’ and conversion to ‘statements of work’ that purport to reduce tax and NIC payable and avoid the obligations of the IR35 reforms. As always, the risk with such ‘one size fits all’ approaches is that they do not reflect the reality of the relationship between the engager and the worker.

Great care needs to be taken by organisations that use off-payroll labour to ensure they are fully meeting their compliance obligations, including IR35, PAYE and NIC and wider governance matters such as the Corporate Criminal Offence legislation and Senior Accounting Officer rules. The safest approach is always to make sure you check the IR35 position each time a worker is engaged (even on repeat contracts) to make sure you remain compliant.  

HMRC’s approach to enforcement

Although HMRC has stated it is taking a ‘soft landing’ approach for IR35 in the private sector, that certainly doesn’t mean a lack of action. Off-payroll engagement in the worker supply chain remains very much at the forefront of HMRC’s areas of focus, and we expect that compliance activity in the private sector will increase significantly over the next 18 months. Understanding your worker supply chain is now more important than ever to maintain good tax compliance.

HMRC has brought a conveyor belt of key employment tax cases before tax and employment tribunals and higher courts. The outcome of these cases has a direct evolutionary impact on the way in which employment status issues, including IR35 status determinations, need to be assessed. In other words, your decision last year might not be valid next year!

HMRC’s “Check Employment Status Tool” (CEST) has been widely used by the private sector in reaching decisions on whether an engagement falls within or outside of IR35. However, we are seeing several cases where HMRC has overridden the decisions received from CEST, often on the basis that the questions have not been answered correctly.

The public sector has been subject to the IR35 reform rules since 2017, and implementation errors are now coming to light: following HMRC investigations, a number of public sector departments have been required to pay over significant monetary settlements (collectively in excess of £100m) despite their use of CEST. It seems highly likely that, in future, HMRC will pursue private sector compliance reviews with equal vigour to collect unpaid PAYE and NIC.  

The public sector examples also illustrate that HMRC is likely to impose additional penalties in the private sector where it is successful in contending that there has been a failure to take reasonable care when reaching IR35 determinations.

Supply chain clarity?

Notwithstanding the complexities in assessing IR35 and the need to ensure judgements in tribunals are taken into account, it can be practically difficult to ascertain if there is a PSC in the supply chain where there are additional intermediaries (e.g. agencies) present in the supply chain, particularly with multiple parties involved. HMRC expects engagers to have undertaken appropriate due diligence on their labour supply chain, and a lack of knowledge is unlikely to be a good defence if PAYE and NIC liabilities arise. Have you taken ‘reasonable care’ to get things right?

How we help

The elements highlighted above demonstrate how difficult it can be to reach an accurate IR35 determination for each engagement. We have, therefore, designed a three-tier methodology to help you to minimise the risks surrounding off-payroll worker supply chains (including IR35):

  • Identifying and understanding your supply chains, not only for IR35 purposes but also for wider supply chain engagement structures which could increase the risk of non-compliance.
  •  Assessing whether the approach you have taken to IR35 assessments and determinations fits with the approach currently being adopted by HMRC and covered by latest case law, and whether you could successfully defend any challenge.
  • Ongoing monitoring templates and implementation of strategic policies which are designed to demonstrate good tax governance and minimise the incorrect IR35 tax and NIC treatment being applied.

The key message is not to assume that any actions taken in advance of April 2021 will be automatically accepted by HMRC, contractors or even the courts. HMRC announced a soft landing for IR35 in the private sector so employers should use this time wisely to sense check that their processes and procedures are still fit for purpose, working as planned and capable of standing up to HMRC scrutiny. Action taken now should save significant disruption and liabilities down the line.

Please speak with Geraldine Browne if you wish to discuss any of the matters highlighted in this article.

Subscribe to receive the latest BDO News and Insights

Please fill out the following form to access the download.