Mushy - Fotolia
IR35 reforms: HMRC confirms compliance checks under way in financial services, oil and gas sectors
Less than six months after the roll-out of the IR35 reforms to the private sector, HMRC has confirmed it has started writing letters to companies requesting details of their compliance procedures
HM Revenue & Customs (HMRC) has confirmed that compliance checks are under way within the financial services and oil and gas sectors, out of concern about how firms in these industries are adhering to the revamped IR35 tax avoidance rules.
The government tax collection agency told Computer Weekly in a statement that the action is the result of “changes in engagement models” emerging within these sectors, which are renowned for being heavily reliant on personal service and limited company contractors.
“We are therefore contacting client organisations in these sectors initially to confirm that they are applying the off-payroll working rules correctly,” an HMRC spokesperson told Computer Weekly.
The reformed IR35 rules came into force within the private sector back in April 2021 and introduced changes that shifted liability for determining how contractors should be taxed onto the medium-to-large companies that engage them.
Previously, it was down to the contractors to self-declare whether or not the work they do, and how it is performed, means they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).
However, in HMRC’s view, this system of self-declaration has been subject to misuse by contractors who have deliberately sought to misclassify their engagements as outside IR35 in the interests of minimising their employment tax liabilities.
Earlier this week, the Institute of Chartered Accountants in England and Wales (ICAEW) published a news alert about letters it claimed HMRC has begun sending out to firms in the oil and gas and financial services sectors, seeking information about their IR35 compliance procedures.
An example copy of the letter, published on the ICAEW’s website, states that the missive is being sent out on behalf of HMRC’s specialist off-payroll working team. It goes on to request information detailing how the recipient is applying the off-payroll rules.
The letter said HMRC is keen to understand the organisation’s hiring process for contractors, and details of the steps it takes to determine their tax status.
“If I decide your systems and processes are suitable, it’s likely I’ll close the check and take no further action,” said the letter. “This is because the risk of you not correctly applying the rules is low.
“If something is wrong, I’ll work with you to correct it or tell you how you can do this yourself… and it may mean you have not paid the right amount of tax, national insurance contributions or apprenticeship levy. You may need to pay us, or we may owe you money.”
The letter added: “If there’s more tax to pay because something is wrong, we may charge penalties. If you tell me straightaway and work with me to correct this, I may be able to reduce any penalties due.”
HMRC confirmed the veracity of the letter in a statement to Computer Weekly.
In the lead-up to the reforms coming into force, Computer Weekly reported on several instances whereby firms within the financial services and oil and gas markets responded to the changes by issuing hiring bans on limited company contractors to sidestep the incoming IR35 rule changes.
Read more about IR35
- In the wake of a consultation earlier this year, the government has drawn up a package of measures it intends to take to help protect contractors from non-compliant umbrella companies and loan scheme promoters.
- Litigators are circling as thousands of contractors realise that the 2017 roll-out of IR35 reforms to the public sector may have resulted in unlawful tax deductions – and the private sector could be next.
In a similar vein, there were also reports of companies in these sectors failing to take reasonable care when individually assessing the tax status of every contractor they engaged with, and instead resorted to making blanket determinations that resulted in every contractor they engaged with being classified as working inside IR35.
HMRC has also previously offered assurances that it would take a “light-touch” approach to enforcing the IR35 during the first 12 months of their implementation to give firms in-scope of the reworked rules time to adjust to their new responsibilities.
For this reason, the fact that HMRC appears to have already started taking steps to ramp up its IR35 compliance activities may come as a surprise to some, said Seb Maley, CEO of contractor compliance advisory Qdos.
“The light touch [talk] is a red herring and businesses shouldn’t pay any attention to it,” he said. “All it means is that HMRC won’t issue penalties and fines for the first year, not that the taxman won’t investigate businesses and demand tax liability payments.
“I’m not surprised that compliance activity has started already. HMRC is under huge pressure to raise revenue as the government looks to recoup the billions spent and lost during the pandemic.”
Maley said any firm that receives a similar letter from HMRC should handle it with care – no matter how innocuous it may seem.
“To view any letters sent by HMRC as innocent checks would be naive,” he said. “Experience tells us that letters can easily lead to IR35 investigations if the taxman has any inkling of non-compliance.
“With this in mind, any correspondence must be handled with care by businesses, who should be exploring all options to ensure their compliance and protect themselves from the risks of IR35.”
Conversely, Dave Chaplin, CEO of contracting authority ContractorCalculator, told Computer Weekly that it should be taken as a good sign that HMRC is taking proactive steps to ensure the private sector is not falling foul of the new rules.
Particularly in the light of reports about government departments, such as the Department for Work and Pensions and the Home Office, finding themselves hit with multimillion-pound tax bills for compliance failures dating back to the roll-out of similar reforms in the public sector in April 2017.
“Cynically, I was thinking they would wait at least a year for a certain amount of tax to build up to make it even worth their while [to pursue these companies], but it looks like they are actively going out there, trying to make sure clients are doing the right thing now so they don’t end up with massive tax bills,” said Chaplin.
“The reforms only came in six months ago and already they are starting to look at sectors to check they’re doing it right, because if it’s just a few mistakes that can be easily fixed, it’s much better to find out earlier rather than later.”
Read more on IT legislation and regulation
HMRC slammed for ‘needlessly’ pursuing CEST-assured outside-IR35 contractor
Top 10 IR35 stories of 2022
IR35: HMRC claims ‘potential’ legislative change in pipeline to address settlement offset issue
NHS Digital confirms final settlement of £3.95m with HMRC following conclusion of IR35 investigation