IR35 Status and HMRC Compliance Checks
WHO IS RESPONSIBLE FOR EMPLOYMENT STATUS?
If the end-client is a public-sector body then the responsibility for deciding the IR35 status of an assignment falls with the organisation responsible for paying the intermediary (usually the public-sector organisation or the agency), in line with the off-payroll rules introduced in April 2017.
Whilst there were no immediate changes to the policing of IR35 within the private sector a consultation was held by the Government on how to tackle non-compliance, which allowed for speculation that the off-payroll rules would eventually be rolled out to the private sector too.
It has since been confirmed within the Autumn Budget of October 2018 that the off-payroll rules will apply to the private sector, and that these changes will come in to force as of April 2020. Whilst there are finer details to be produced between now and April 2020, broadly speaking the responsibility for IR35 compliance will rest with the organisation responsible for paying the intermediary (the end-hirer or the agency). Some exceptions apply where the end-hirer is a ‘small organisation’, and it is expected that such exceptions will be clarified within the draft legislation as suggested above.
Currently, it remains the responsibility of individual limited companies (up until April 2020) to ensure that their IR35 status is clear, and it is our advice that taking dividends in the absence of careful consideration of the IR35 position of an assignment places those companies and their directors at risk. However, we urge end-hirers and recruitment businesses to be proactive by utilising the time afforded by the Government to prepare for the changes ahead and ensure that they have a clear position in relation to the IR35 position of their off-payroll workers.
IR35 COMPLIANCE CHECKS
It is an important part of HMRCs work to ensure that the tax system operates as Parliament intends, ensuring that individuals and businesses are paying the correct levels of tax.
As part of establishing that the correct levels of tax are paid, HMRC carries out compliance checks or IR35 investigations. As part of these they may investigate into the employment status of a limited company’s assignments. Following the above-mentioned changes in 2020, the HMRC will enquire into an end-hirer’s justification for paying a limited company contractor a gross payment. For the purposes of this document, “compliance check” will mean an investigation by HMRC into the employment status of a limited company.
The instigation of a compliance check does not necessarily mean that something is wrong in the eyes of HMRC – many checks are simply routine. Brookson Legal Services unfortunately are not privy to any information pertaining to how HMRC presently selects limited companies for an IR35 assessment, but we can advise that the consistent management of employment status will place you in the best possible position should the situation arise. In the event that reasonable care has not been taken in relation to tax affairs, one of the significant penalties which HMRC uses to prevent people from gaining an unfair advantage over others who comply with their tax obligations may be faced.
FAILING TO COMPLY WITH An IR35 COMPLIANCE CHECK
HMRC will write to you or make a telephone call to inform you of what they want to check.
HMRC has far reaching powers at their disposal. It is important that you respond to them in the event of a compliance check as soon as you possibly can. Dealing with a check co-operatively is completely at your discretion, however it is worth bearing in mind that, where a check results in a penalty being issued, HMRC will consider how co-operative you have been throughout the process. Generally, the more help given to HMRC, the lower the penalty will be.
WHAT DOES An ir35 compliance check entail?
Within their initial correspondence to inform you that an IR35 investigation is being carried out, HMRC will likely request certain information from you. This could include:
- A breakdown of the income for your company during the tax years in question
- Copies of contracts and supporting documentation giving rise to that income
- Names and contact details for your end-hirer
- Whether you have considered the possibility of off-payroll workers being subject to the IR35 legislation and details as to when such consideration was made
Once the 2020 changes have been implemented it is likely that HMRC will request similar documentation from end-hirers or recruitment businesses, and they may request a detailed justification explaining why gross payments have been made to certain limited companies.
HMRC will examine the response to their initial request, upon completion of which they may make further contact to ask questions in relation to the day-to-day working practices of the independent contractor on assignments which took place during the tax years in question.
It is at this point that HMRC may request to meet you face to face to discuss their queries in relation to the working practices, however you do retain the option to deal with the matter via letter. There are pros and cons to each.
At present, once HMRC are satisfied that they have explored the working practices sufficiently, they will seek to confirm the circumstances set out by you with the end-hirer to which your company provided its services.
Upon completion of this investigation, the HMRC will write to you to report their findings in relation to the employment status of your assignment during the tax years in question.
In the event that the HMRC deem an engagement to have been one of disguised employment, they will issue a statutory payment letter informing you of the amount that your company or organisation is liable to pay. Not only will that figure include the outstanding tax and National Insurance Contributions, but HMRC will add any interest due and may also charge a penalty. Any penalty charged will be a percentage of the additional tax owed based on the type of inaccuracy made to your tax documents which led to you not paying the correct level of tax. Accordingly, the more serious the reason for the inaccuracy, the higher the penalty can be.
A penalty will be charged if the inaccuracy is:
- Because you failed to take reasonable care
- Deliberate – for example intentionally submitting an incorrect document;
- Deliberate and concealed – for example intentionally submitting an incorrect document and making attempts to hide that error
If a penalty is received for failure to take reasonable care, this can be suspended by the HMRC for up to 2 years to allow for the required amendments to be made to the relevant documents. Once you have completed the required changes, HMRC may exercise its discretion and cancel the penalty.
The above has been advised based on 18 years’ experience of Brookson Legal Services having assisted individual limited companies with HMRC compliance checks. Whilst there is no certainty around the manner in which such compliance checks will be conducted following April 2020 when the subject of those checks becomes the organisation responsible for paying the limited company, the HMRC have confirmed that the tests established to determine employment status will remain the same. It is therefore logical to expect that the HMRC will require the same information from end-hirers and recruitment businesses as they currently do from individual limited companies.
HOW DO YOU TAKE REASONABLE CARE?
Every individual or business is expected to maintain records allowing them to provide complete and accurate documentation to HMRC. It is also expected that, in the event that you are not sure in relation to your position, you consult expert advice.
However, reasonable care is different according to the abilities and circumstances of each individual or business.
To show that “reasonable care” has been taken, the following will be helpful:
- Keeping accurate records, which you regularly update, to make sure your tax returns are correct;
- Saving your records in case you need them later;
- Checking the correct position when you do not understand something, or seeking advice from a competent adviser;
- Informing HMRC promptly about any error you may discover.
Find out about the cost of non-compliance with the off-payroll in the private sector rules
WHAT BROOKSON Legal Services CAN DO FOR YOU
All customers of Brookson are entitled to free IR35 assessments and advice from Brookson Legal Services, but we also offer a bespoke IR35 assessment service to non-Brookson customers.
The only way to be sure that you are applying the appropriate tax treatment to your income is to have your assignments reviewed by a specialist. Brookson Legal Services offers a trusted IR35 assessment service, drawing on 18 years of employment status experience to provide you with the most accurate advice and support in relation to your IR35 compliance.