The time of ‘light touch’ penalties for employers that fail to comply with Off-Payroll Working rules for IR35 are over, warn tax experts from BDO. Nick Duffin, employment tax principal (pictured left), and Jacqui Roberts, employment tax director (pictured right), outline the key questions to ask yourself ahead of an HMRC review.
Employers have been obliged to operate the off-payroll working rules for IR35 for several years and some are being caught out as HMRC makes IR35 reviews part of their standard compliance routines.
The off-payroll labour (OPL) obligations were implemented in the public sector first. After relatively low enforcement activity in the first couple of years, there were suddenly several high-profile cases with substantial PAYE/NIC arrears.
We are now seeing increased HMRC activity for IR35 and wider OPL inspections in the private sector. The time of ‘light touch’ penalties for non-compliance has passed.
HMRC’s increased focus on off-payroll workers (OPW) means those organisations falling within the Business Risk Review+ regime are required to complete a detailed questionnaire on their use of OPWs. Organisations that are handled by the medium size business team at HMRC will face a similar questionnaire.
We have seen the publication of new guidance by HMRC on the IR35 private sector reforms and updates to the employment status manual. This includes 14 new sections to help businesses understand what HMRC considers good practice and updates to HMRC’s check employment status for tax (CEST) tool reflecting recent case law.
Rules recap
Organisations which directly or indirectly engage OPWs, usually via a personal service company (PSC), fall within the rules. However, you may be outside the rules if you are a small business. The definition of a small business is taken from the Companies Act 2006 and applies if the group including connected and overseas entities satisfies two or more of the following:
- annual turnover not exceeding £10.2 million
- balance sheet total not more than £5.1 million
- average of no more than 50 employees for the company’s financial year.
Where two or more of these requirements are met for two consecutive financial years, responsibility for applying the IR35 rules remains with the intermediary.
If, however, your business does not fall below these limits, you must apply the IR35 rules from the start of the tax year following the accounts filing date for the second financial year.
Business obligations
As a large or medium sized business, HMRC now expects you to have implemented a robust methodology to identify all PSCs (whether engaged directly or indirectly via third parties), assess their IR35 status and, if required, apply PAYE/NIC deductions for any deemed employment arrangements.
In all instances, before payment to a contractor is made, you must ensure an IR35 status review has taken place, and a status determination statement (SDS) has been communicated correctly to the labour supply chain.
In addition, you must be able to track the assessments made and deal with any disagreements by the worker within a 45-day window.
Finally, you must have conducted a robust due diligence exercise to support any decision that a chosen supplier is exempt from these rules because they do not provide a personal service. This can often be challenging to prove.
So are you ready for an HMRC inspection on off-payroll labour?
Key questions to ask yourself
- Have you implemented suitable processes to identify all supplier contracts with PSCs in your supply chain including out-sourced services?
- Does your internal process for assessing engagements demonstrate that reasonable care has been taken in all areas of the process, including comprehensive policies? And have you implemented process maps to adhere to the business’s governance obligations?
- Are your staff suitably trained to understand the nuances of employment status on how to interpret HMRC’s rules? What evidence is there? E.G. training materials etc
- Do you have sufficient processes in place to ensure that only bone fide Umbrella companies are used and contractual terms are robust?
- Have you retained sufficient evidence to demonstrate how the contractual and actual terms of engagement reflect your conclusions?
- Are you carrying out periodic reviews and incorporating the process into your internal audit programme?
If you can genuinely answer yes to these questions then you are likely to have managed your OPL risks. If not, you probably have some work to do.
Wider risks
Finally, it is perhaps unsurprising that the risks of OPL liabilities frequently crop up during due diligence exercises during the purchase of a business or in financing transactions. No purchaser will be keen to take on an unquantified tax and NIC risk if their intended target business has not got their OPL obligations under tight control, and it may even deter investors and lenders.
The OPL rules are now part of the UK employment tax landscape, so if you are not 100 percent certain your business is up to scratch, now is the time to review your approach.
