We are beginning to warn of a renewed and robust HMRC focus on IR35 off-payroll legislation and compliance within the private sector, and the increased, and often unknown, risk for recruitment agencies.
Published on 19 September, 2023
The IR35 off-payroll legislation is aimed at ensuring contract workers, who operate via their own limited company, pay tax and National Insurance Contributions at employed levels where their contractual engagements amount to disguised employment.
“Since the off-payroll legislation incepted in April 2021, we’ve seen limited HMRC compliance activity in the private sector,” said David Harmer, associate director at Markel Tax. “What we have seen is large public sector bodies caught out, often by using CEST, HMRC’s own online assessment tool, to the tune of close to £300 million in fines and liabilities.”
More recently, however, Markel Tax is seeing HMRC more actively contacting private sector firms to ask about their processes in relation to off-payroll legislation. Their aim is to gather information to enable a decision about whether to investigate the organisation’s activity. Markel Tax has seen an increasing number of enquiries coming through their insurance claims department as well as direct approaches by customers.
We're advising that recruitment agencies need to be absolutely clear that their clients' processes around establishing if IR35 applies and issuing status determination statements are robust.
“End clients are typically responsible for making their own IR35 decisions,” continued Harmer. “However, if that decision is found to be incorrect, but the client is judged to have shown reasonable care, liability would rest with the fee payer, which is the recruitment agency responsible for paying the limited company contractor.”
Knowing that liability may not rest with them means that some clients will more easily roll over under HMRC scrutiny and accept liability, leaving their agencies exposed.
We believe HMRC is under pressure to demonstrate that the IR35 off-payroll legislation does work and can raise significant revenues for the Treasury. This is especially true in light of the Government’s near decision to repeal the legislation in October 2022 and the danger that this might still happen with pressure to find votes in the upcoming election.
“The revenue is being assertive in its approach to this issue, not like the softly, softly line they sometimes take. Their letters contain specific questions such as the number of contractor clients engaged and whether they are now working under an umbrella structure. This is another sign that they are going after firms and agencies that don’t comply in a very focused way,” said Harmer.
The use of online tools in isolation to determine the IR35 position is another risk for recruitment agencies
Firms relying solely on automated tools can be left exposed. They are at risk of HMRC challenging whether or not reasonable care has been used. Placing all reliance on technology without looking carefully at how someone is actually working in practice (especially in grey areas), as well as their contractual terms and conditions, could be construed as not taking reasonable care.
"There are a number of things agencies can do to protect themselves" says Harmer. Insurance is a good idea because not only will it cover for any additional tax, National Insurance, interest and penalties due to HMRC, it also means experts will be available to support when facing an HMRC challenge. And if online tools are used, choose one that has experts on hand to assess the written contracts, because if the contracts do not match up with the working practices, you will not have an accurate decision which could cause problems.
Get in touch with Markel Tax’s IR35 experts by emailing IR35@markel.com