With changes to the off-payroll working rules just around the corner, will IR35 insurance still be a necessity for contractors? By looking at HMRC's ability to investigate previous tax years, we can lay out the facts for you
The IR35 reforms to be implemented in the private sector from April 2021, will see the responsibility for determining IR35 shift from the contractor to their end client. This means that contractors working for a medium to large-sized organisation will no longer carry the IR35 liability post April 2021. Instead, the liability for IR35 will rest with the ‘fee payer’ (the organisation responsible for paying the contractor).
What if my end client is classed as a small company?
Medium to large clients are defined as companies which meet two or more of the following conditions:
- Have an annual turnover of more than £10.2 million
- Have a balance sheet total of more than £5.1 million
- Have more than 50 employees
If a contractor’s end client is a small business, that client will not need to determine the employment status of its off-payroll workers. This responsibility will fall back to the contractor. This means that contractors will carry the liability for their own IR35 status whilst working for a small company. In this situation there would be no real change and adequate IR35 insurance, such as our TLC policy, would still need to be in place.
See HMRC ‘s guidance on this matter below:
“If you’re a small-sized client in the private sector you’ll not have to decide the employment status of your workers. This will remain the responsibility of the worker’s intermediary (usually a limited company). However, you must confirm your size if asked by the person or organisation you contract with, or the worker. This is to make sure that you, agencies and workers can consider what rules apply.”
HMRC’s power to enquire into previous tax years
HMRC do have the power to enquire into previous tax years and regularly exercise their right to do so. HMRC’s right to enquire into previous tax years allows them to go back as far as 4 years under normal circumstances, 6 years where HMRC suspect careless behaviour or 20 years where fraud, or ‘deliberate behaviour’ is suspected. Such cases of fraud or deliberate avoidance would not be covered under insurances such as our TLC or Tax Enquiry Insurance.
In August 2019, HMRC sent almost 1,500 letters to contractors who had previously or were currently working for global pharmaceutical giant, GlaxoSmithKline (GSK). The letters, while not being considered a formal enquiry, accused contractors of wrongly operating outside the IR35 legislation during the tax year 2018/19. The letter was issued by HMRC without them having undertaken any checks concerning the IR35 status of the contractors concerned. Where contractors disagreed with HMRC’s letter they were required to respond in writing to HMRC to explain why. This only goes to show the lengths HMRC will go to in order to ensure previous compliance.
Despite the change in legislation, IR35 risk will remain for most contractors. If HMRC considers there to be sufficient tax at stake, they will undoubtedly use their power to open enquiries into earlier tax years. Given the current state of the economy, this would be a useful means by which to claw back desperately needed revenue.
IR35 risk for previous tax years
From April 2021, unless you are working for a small company, you will no longer need to determine whether your engagement is caught by the IR35 rules and you will not carry the IR35 liability from this point. This does not mean you should forget about IR35 altogether.
Whilst the IR35 rules will change from April 2021, previous tax years will not be affected. The IR35 rules which have been applied since 2000 will remain applicable to all tax years preceding 2021.
In other words, contractors will still be exposed to IR35 liability for income earned on contracts undertaken during tax years prior to April 2021.
The change in IR35 legislation does not, therefore, completely remove IR35 associated risks. Although HMRC have stated that they do not intend to make automatic enquiries into previous tax years where a contractor’s employment status is reclassified, this should be taken with a pinch of salt. HMRC’s ‘Contractor Factsheet
’ summarising the changes to IR35 states;
“Depending on your own personal circumstances the terms of your contract may change. It is also possible that you will pay additional income tax and NICs if you had not previously been applying the off-payroll rules (IR35) correctly. However, HMRC will not use information resulting from these changes to open a new enquiry into earlier years unless there is reason to suspect fraud or criminal behaviour.”
In the meantime, and even following 6th April, contractors therefore should ensure they have sufficient due diligence in place to evidence their tax position. As we saw in the public sector and in the lead up to the original implementation date for the private sector – many contractors were being forced inside IR35 or onto PAYE and despite promises from HMRC – any indication that you may be paying tax incorrectly, may lead to an investigation or a simply a demand for taxes.
We are currently in an uncertain time for IR35 compliance activity and what that might look like, so protection is just as important as ever. IR35 insurance will remain a useful ally to protect against IR35 enquiries into previous tax years and for those contractors working with small clients. HMRC are becoming more and more aggressive in tackling what they perceive to be ‘tax avoidance’, the targeted campaign against GSK contractors in August last year may just be the tip of the iceberg.
For more information about our IR35 insurance and what we can do here at Qdos to help you prepare for the reform, get in contact with a member of our team. Contact one of our IR35 experts on 0116 269 0999 or email us at [email protected].