Off-Payroll workers – Ready for a review by HMRC?

Original content provided by BDO United Kingdom

It is two years since the ’IR35’ legislation, relating to the engagement of off-payroll workers (contractors) was revised to make medium and large-sized organisations solely responsible for determining each contractor’s status and paying the tax and NIC where appropriate. But the rules were first introduced for the public sector in 2017 - so HMRC now has significant experience in what can go wrong with engager compliance.

HMRC’s approach to enforcement

HMRC are stepping back from their initial ‘light-touch’ approach to enforcement and are ramping-up their activities. Despite this, where a business can demonstrate it has taken 'reasonable care’ in complying with the legislation, HMRC are unlikely to seek penalties if anything has gone awry: could your business prove you have taken ‘reasonable care’?

HMRC information gathering by nudge

Recently we have seen HMRC issuing ‘nudge letters’ to employers requesting numerous pieces of information regarding their engagement of contractors. These give businesses just 30 days to respond to requests for information such as:

• How many contractors do you engage either directly on a self-employed basis or via a PSC?
• Have you confirmed the employment status of those engaged and have supporting evidence.
• As a result of employment status assessments concluding “deemed employee” status, how many contractors have been added to the payroll?

While HMRC suggest this approach is intended to be supportive of businesses, receipt of these “nudge letters” can be a challenging and expensive exercise for businesses to respond to because:

• The time required to collate this information and respond to HMRC’s request (not responding to a nudge letter may not be terminal, but certainly is a high-risk strategy).
• The discovery of any errors and subsequent corrections is likely to take more time and give rise to income tax and NIC liabilities.
• HMRC will seek interest on any PAYE and NIC underpayments, with the possible addition of tax-geared penalties unless reasonable care has been demonstrated in all aspects of their approach to IR35 compliance.
• If there are penalties, these will be higher following a nudge from HMRC as any corrections they will be classed as ‘prompted’ disclosures rather than ‘unprompted’ corrections.

Managing your risk

Businesses should actively monitor their compliance with the legislation, and prepare to mitigate the risk of a negative HMRC review by:

1. Identifying contractors

Carefully monitoring of supply chains, to identify contractors, should form part of an ongoing review process to enable the management of risk before a problem arises. Typically, this would be prior to the contractor delivering work/services to the business and lead to an employment status assessment being carried out and recorded. Collating and reviewing the necessary information after the fact can be challenging as it relies upon a detailed analysis of financial systems. Where you have a strong monitoring system in place, it will be far quicker and easier to respond accurately to any “nudge letters” received from HMRC.

2. Processes and Controls

Establishing a clear process and obtaining stakeholder buy-in is often key to managing the tax risk effectively. Any process/control(s) established should cover most day-to-day scenarios yet be flexible enough to enable exception reporting too.

3. Training

The engagement of contractors within the business often involves numerous stakeholders. Therefore, it’s vital that adequate training is rolled-out and continues to be available to ensure that all employees who may engage a contractor understand the process and related risks of non-compliance.

4. Internal reviews

Even if you are not required to comply with the Senior Accounting Officer rules, you should be periodically reviewing processes to ensure they are fit for purpose. For example, checking whether employment status assessments have been completed accurately and consistently, and reviewed periodically during an engagement. In addition, it is important to confirm if payroll obligations have been met, whether that be internally or via a 3^rd party.

5. Policies

Finally, businesses should develop policies which document each of these points. They should demonstrate a clear understanding of the legislation, how the business applies the legislation to its specific needs and identify the key internal stakeholders – so that you can prove that ‘reasonable care’ has been taken.