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HM Revenue & Customs (HMRC) is facing criticism over an IR35-related letter-writing campaign targeted at contractors who have dealings with pharmaceutical giant GlaxoSmithKline (GSK).
The tax collection agency is understood to have written to around 1,500 contractors who are currently (or have previously) worked for GSK, asking them to retrospectively review the tax status of their engagements with the firm for the 2018-2019 tax year.
According to a report in the Financial Times, many of the contractors targeted by the letters include individuals working in the IT and biomedical sciences divisions at GSK.
“We’re certainly not suggesting that all of the people we have written to have deliberately set out to pay less tax,” an HMRC spokesperson told Computer Weekly. “The letters give them the opportunity to confirm they are following the off-payroll rules correctly.”
The letter, seen by Computer Weekly, advises recipients to use HMRC’s online Check Employment Status for Tax (CEST) tool to ascertain if the nature of the work they did with GSK means they should be taxed in the same way as salaried employees (inside IR35) or as off-payroll workers (outside IR35).
“Whether a worker is employed or self-employed for tax purposes is not a matter of choice. Instead, you need to look at the facts of the working relationship between you and GSK,” the letter reads.
“This will help you decide if you would have been an employee of GSK had you worked for them directly and not through your personal service company (PSC).”
Read more about the IR35 reforms
- HM Revenue & Customs (HMRC) has confirmed that the much-criticised Check Employment for Tax Status (CEST) tool will undergo enhancements to ensure it is fit for purpose ahead of the IR35 reforms being extended to the private sector in April 2020.
- The publication of the draft private sector IR35 tax avoidance legislation has prompted renewed calls for the plans to be scrapped over fears about the harm it could cause to UK’s IT contractor workforce.
The letter then goes on to say any recipients who determine their engagements qualify as outside IR35 need to provide the agency with evidence to support their claim by 19 September 2019.
On the contrary, any who end up reclassifying their engagements as inside IR35 need to work out how much in National Insurance Contributions and Pay As You Earn (PAYE) tax they generated as a result of they work they did for GSK. That sum then needs to be paid to HMRC by the 22nd day of the next tax month.
Anyone who does not comply with the letter could be subject to a compliance check and the threat of a penalty charge, the letter concludes.
“If we find that you have not done what we asked, this may lead to further work. We call this a compliance check. If we carry out a compliance check and find something wrong, we may charge you a penalty.”
What's the motivation?
At the time of writing, it remains unclear what has prompted HMRC to target GSK’s contractors, as the tax collection agency declined to directly address the question when Computer Weekly approached it for comment on this story.
“HMRC works to ensure everyone pays the tax that is due under the law. Our compliance activity spans a variety of industries and is focused on specific areas based on our analysis of where current risks to the tax system lie,” An HMRC spokesperson said, in a statement.
“The off-payroll rules exist because it is fair that two people working in a similar way broadly pay the same tax and National Insurance, even if one of them chooses to work through their own company.”
Meanwhile, a spokesperson for GSK said the firm is aware that “some of its agency workers” have been written to by HMRC over the course of the past week, and said it is encouraging those affected to take the matter up with their tax advisers.
While the wording of the letters seems threatening, scaremongering and disingenuous, Rebecca Seeley Harris, head of off-payroll at employment law specialist Re Legal Consulting, said contractors need not be afraid.
“Although it sounds very threatening, the letter has no legal basis,” she told Computer Weekly. “It would be wise, however, to respond and definitely not ignore it.”
Tax protection insurance
In terms of how best to respond to it, she said contractors should first check to see if they have tax protection insurance to cover them in the event that HMRC does decide to investigate their case, which can incur costs.
“Secondly, they need to check with their accountant to see if they checked for IR35. If the contractor has been to an IR35 specialist, then they should have all the evidence, including the outcome of the CEST tool. This can be sent back to HMRC to rebut the opinion.”
Computer Weekly understands that GSK is far from the only organisation whose contractor workforce was on the receiving end of such missives, but it is important for contractors not to lose sight of the fact that HMRC has no idea about the true nature of their working relationship with their clients, said Seb Maley, CEO of IR35 tax advisory service Qdos Contractor.
“Contractors mustn’t panic,” said Maley. “At this stage, the tax office will not have reviewed these contractors’ actual working practices, which are vital in determining whether a contractor belongs inside or outside IR35.”
“With the right help, independent workers subject to an IR35 enquiry will be in a position to challenge HMRC and protect their financial interests.”
Retrospective IR35 reviews
Either way, news of the letter-writing campaign is sure to fuel fears that HMRC plans to use its powers to embark on retrospective tax avoidance investigations, fuelled in part by the roll-out of reforms in recent years to the way IR35 works in the public sector.
The changes mean, since April 2017, public sector contractors have been stripped of the responsibility for self-declaring if their engagements should be classified as inside or outside IR35. Instead, it is now down to the organisations they engage with to determine that.
There are concerns that if a contractor who has previously identified as working outside of IR35 is deemed by their employer to be operating inside IR35 that HMRC might pursue that individual for back-dated tax payments, for example.
“It’s important for contractors to bear in mind that HMRC can investigate anything up to six years in an IR35 enquiry,” said Maley. “Therefore, the need to be confident of IR35 compliance is absolutely vital.”
“The tax office is under pressure to raise revenues and clearly believes IR35 is an area in which it can achieve this,” he said.
Indeed, the government’s own figures, published around the time of the Autumn 2018 budget, predict that the incoming changes to how the IR35 regulations are applied in the private sector are on course to net the Treasury £3bn by the 2023-24 financial year.
If that turns out to be true, it will make the IR35 private sector reforms the single biggest source of revenue generation in the autumn 2018 budget.
“With this in mind, we shouldn’t be particularly surprised that HMRC is focusing on contractors previously engaged by GSK. But that’s not to say the way it has gone about this is reasonable,” said Maley.
Indeed, Alasdair Hutchison, policy development manager at the Association of Independent Professionals and the Self-Employed (IPSE), said the letters risk adding to the “chaos” and “confusion” already caused by IR35, which is set to get worse with the private sector roll-out.
So much so, given there is already evidence to suggest that HMRC is struggling to interpret and enforce the regulations effectively, said Hutchinson.
“HMRC has lost six out of the last seven IR35 cases, and when it cannot interpret its own legislation, how can it possibly expect businesses across the UK to? This uncertainty adds a huge burden both to micro-businesses themselves and the companies that rely on them to drive innovation,” he said.