What might HMRC demand from private sector firms in an IR35 enquiry?

Exploring the tax office’s possible compliance activity based on public sector experience

With it having been confirmed that changes to the off-payroll working rules will certainly be introduced in the private sector on 6th April 2021, much is being made about how HMRC might police IR35 compliance when controversial reform arrives next year.

Many medium and large private sector firms, that will become responsible for administering IR35 status next year, want to know how to spot an IR35 enquiry and are rightly interested in learning more about what shape it may take.

Having supported numerous public sector organisations with similar reforms introduced into the sector in 2017, at Qdos we are able to draw on the approach taken by HMRC in an ongoing IR35 investigation. 

While we can’t reveal any of the details of the enquiry, in this article we’ll focus on the demands made by the tax office in a letter sent to a public sector body, which is likely to offer insight into HMRC’s plans for private sector compliance activity.

 

 

‘Routine’ IR35 compliance checks

Under the existing rules in the private sector, HMRC tends to scrutinise specific contracts and time periods in an opening letter to the contractor. However, and other than it will be the end-client who receives the correspondence, this approach looks set to change when the reform lands.

In a letter received by one of our public sector clients in 2018, the tax office opens proceedings with what is best described as a compliance check, in which HMRC requests a host of information regarding the end-client’s IR35 processes.
As the letter explains, HMRC “would like to check your compliance with the new legislation, including any systems you have introduced to help you decide whether the off-payroll rules should apply when engaging workers via their own intermediary.”
On the face of it, these ‘compliance checks’ may seem routine and harmless, but businesses must ensure to manage them very carefully.

 

Request for substantial information

The letter asks the end-client to provide a range of information, which suggests HMRC is hoping to build a picture of how a business has approached the changes before focusing on specific or a number of contracts simultaneously.

For example, in the letter received by this public sector body, the recipient is asked to submit to HMRC the following:

• Specific steps taken to prepare for the reform
  
  
• The “systems/processes” in place to determine IR35 status. For example, method used (CEST/IR35 contract review), the IR35 decision maker and ways compliance is ensured
  
  
• Number of contractors engaged in the tax year in question
  
  
• Inside/outside IR35 contractor split
  
  
• Contact information for all contractors deemed outside IR35 and details regarding their engagement
  
  
• Contractors who have been engaged via an umbrella or became employees after being assessed as inside IR35

 

The letter asks for a response by a set date. As tempting as it may be to reply without hesitation – even more so given the seemingly innocuous approach taken by HMRC – businesses are advised to approach this with caution and seek the advice of an IR35 specialist, such as Qdos. 

 

Possible blanket IR35 enquiries 

HMRC’s strategy in this letter alludes to possible blanket IR35 enquiries, similar to the way 1,500 contractors engaged by pharmaceutical giant, GlaxoSmithKline, were targeted last year.  

While the tax office tends to carry out investigations on a case-by-case basis and in theory should continue to do this, the fact that role-based IR35 assessments are considered compliant by HMRC suggests that they may investigate groups of contractors who have been subject to grouped IR35 assessments. 

 

Clear audit trail a necessity 

The strategy shown by HMRC in the public sector shows how important it is that private sector businesses are able to demonstrate a clear and compliant audit trail. The tax office is keen to explore in detail the processes in place to manage the reform in accordance with the law. Given the public sector changes were considered a pilot project for the private sector, it seems likely that HMRC will continue with this approach. 

Following the news that reform will now definitely go ahead, and given HMRC’s view that there is widespread non-compliance in the private sector, businesses are encouraged to prepare immediately to ensure they are able to manage the changes in accordance with the rules well before changes arrive next April. 

Qdos is working with over 2,200 organisations, helping them prepare for and manage changes to the off-payroll working rules. For more information and to hear how we could support your business, please contact our IR35 experts on 0116 478 3390 or email [email protected].