IR35 reform, implemented into the private sector in April of 2021, saw medium and large sized businesses become responsible for determining the IR35 status of their contractors. These changes brought the private sector in line with the public sector and six months later we continue to see its impact on the flexible economy.
The most recent news hitting industry headlines is of the case between Professional Game Match Officials Limited (PGMOL) and HMRC. This employment status case has been sent back to First Tier Tribunal which signals progress for HMRC, who believe that PGMOL had wrongly engaged 60 professional football referees as self-employed.
Whilst traditional employment status regulates sole traders rather than contractors working through personal service companies, potential changes to how traditional employment status is tested could change IR35 as well. This is because both legislations use the same status tests and operate in much the same way; IR35 is essentially a sub-legislation of traditional employment status.
The three key IR35 status tests (the right of substitution, control, and mutuality of obligations) were all derived from the traditional employment status case of Ready Mixed Concrete. As this is the case, it stands that any new employment status case law could go on to impact how IR35 is determined.
It is the key status test of Mutuality of Obligations (MOO) that is under question in the case of PGMOL. The case largely hinges on HMRC’s understanding of Mutuality of Obligation. If PGMOL are ultimately successful, it will mean that not only do HMRC have to go back to the drawing board, but so would their infamous CEST tool that currently and purposefully omits MOO when making determinations.
Whilst it seemed HMRC’s focus would now be on businesses engaging PSCs, it’s highly unlikely they will let retrospective enquiries slide off their radar.
Two contractors supported by Qdos received communications from HMRC back in July requesting information relating to a PAYE compliance check. Historically, we have seen evidence of seemingly innocent PAYE compliance checks being followed by IR35 investigations; a tactic which had more or less stopped over the past decade when HMRC became more direct in their enquiries.
If this is indeed the case as we suspect, it only goes to show that HMRC have not given up their chase for contractor compliance. This continued policing of contractors is possible due to the fact that HMRC still have the right to investigate retrospectively into contracts that took place before the implementation of IR35 reform.
We have also had a number of direct IR35 compliance probes into contractors recently. In one case, two contractors who were working at the same end client received letters simultaneously. Thankfully both contractors held Qdos tax insurance and, having robustly responded to HMRC, we were able to quickly close the cases down.
Because of HMRC’s cloudy track record with their use of information requested, we strongly advise that HMRC enquiries of any kind are handled carefully, ideally with the support of tax experts from the very outset.
A few weeks ago, it appeared that HMRC had kick-started compliance activity against organisations engaging contractors within both the financial services and oil and gas sectors. This was reported to have begun with initial letters sent to establish communication between HMRC and those businesses that engage contractors.
From these letters HMRC wish to collect information about hiring processes, the procedures for determining employment status, and the decision process for outsourced services that are fully contracted out.
This serves as a reminder that whilst the “soft landing” for IR35 reform promised a lack of penalties, it did not promise a lack of investigation whatsoever. As such, it is important that end clients have the necessary protections in place and ensure an up-to-date knowledge of relevant legislation and case law where possible. Contractors should also remain wary of any subsequent IR35 enquiries into previous tax years that could follow.
As we speculated back in February, HMRC’s compliance activity has continued to be on the rise in recent months and appears set to carry on later into the year.
As a contractor, your best line of defence against the prying compliance eyes of HMRC is to first understand the level of risk your business is open to. HMRC retain the right to investigate retrospectively as far back as 20 years where applicable.
Once you understand your level of risk you can then decide what kind of professional support would be best for you. Here at Qdos we are able to not only offer a range of award-winning insurances but also a wealth of free IR35 resources designed to offer straightforward information ready for when you need it most.
If you require any further information or guidance, a team of dedicated experts are on hand to assist you with any IR35 queries. Feel free to contact us so we can ensure that you have adequate protections in place.
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