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HMRC IR35: tips and pointers

HMRC IR35: tips and pointers

We have previously discussed the planned extension of the Off Payroll Working rules to medium and large size employers in the private sector from 6 April 2021. This involves shifting the responsibility that currently exists under IR35 for a supplier company to operate PAYE to the engager that pays the intermediary supplier company. Medium sized and large employers will be required to consider arrangements involving contracts granted to suppliers who provide their services through a personal service company or similar entity and decide whether PAYE should be operated. There will be difficult decisions to make for the engagers.

An engager must issue a Status Determination Statement to a worker and any third party it contracts with. This is no small undertaking. The new rules will require an engager to take reasonable care and HMRC has issued guidance on what constitutes reasonable behaviour. The range of criteria for reasonable and unreasonable is almost as complicated as determining a worker’s status. We will look at this process more closely in an upcoming newsletter.

Engagers could decide in all cases of doubt to determine a worker as having an employment status , thereby increasing the commercial risk of losing access to an important skills base or risking further complications when determinations are challenged. Alternatively, they may continue to operate the rules appropriately and comprehensively so that the service providers stay on existing terms where that is the correct basis for an engagement. However, utilising that second approach will come with the knowledge that the primary financial risk for any failure to operate PAYE correctly rests with them as the engager, notwithstanding the fact that most contracts for services include tax indemnity clauses.

Beware HMRC enquiries

But what if HMRC challenges a status decision where an engager decides there is not a requirement to operate PAYE? To recap the new rules briefly, an engager must make a decision on the status of any contractor and ask themselves whether the individual delivering the services would be considered to be an employee of the engager but for the existence of a personal service company or similar entity through which the services are provided (the IR35 rules). HMRC can review and challenge a decision not to operate PAYE under the new Off Payroll Working rules.

Beware any such enquiries; the House of Lords Select Committee that reviewed Off Payroll Working heard evidence of unsatisfactory attitudes and approaches by HMRC officers that echo our own experiences in some cases.

HMRC has an agenda

HMRC will not make enquiries into the status of individuals who are deemed by engagers to be within the scope of the new rules and subject to PAYE. As with the current rules and IR35, HMRC’s objective is to identify individuals whom they consider should be within the scope of PAYE and to collect additional tax and duties. The pitfalls listed below reflect an approach that is intended to increase the scope of PAYE. It would be naïve to assume HMRC is simply carrying out routine health checks when it looks to test how the new rules are being operated. The conclusion of such an enquiry can involve assessments to tax, interest and penalties and so engagers should pay close attention to any interaction with HMRC from the very beginning.

Don’t let HMRC’s views or opinions become facts

Where a Revenue Officer is tasked with finding evidence of an employment, it is possible that they will interpret answers to questions or information that supports a case for employment status. In our experience, there can be a further risk that officers will listen for certain answers, assume a certain emphasis or attempt to “fill in blanks” that are consistent with an anticipated or desired pattern. The danger is that information gathered at meetings can be skewed or moulded by asking leading questions or by repeating answers for clarity which are not precise or have a different emphasis. The accumulated effect will alter the overall balance of the explanations given of a particular engagement. An officer’s preconceptions or opinions can begin to contaminate what should be a straightforward process of establishing the facts.

Everything you say or do is potential evidence

The answers to questions given at a meeting will be written down and used to produce meeting notes. You may think that this would be a collaborative process where both parties look to agree the facts but that is not necessarily the case. We have encountered situations where meeting notes contain errors because an officer has misheard, misunderstood or misconstrued answers given at a meeting. When brought to the officer’s attention we have been told not only will the notes not be changed but, if necessary, the officer’s handwritten notes will be produced as evidence at a Tribunal Hearing. Regrettably, in a particular case and after going through the complaints procedure in HMRC, this approach was supported by senior managers within HMRC. This confirms the need to manage any meetings with HMRC closely to prevent the risk of any such behaviour.

HMRC may cherry pick its evidence

Having described a process where answers given at a meeting are written down, converted into notes and put forward as evidence, that does not necessarily follow where answers to questions do not support HMRC’s aim of finding that an employment status exists. The notes may record answers to questions that indicate there is no employment status, but these answers will not be regarded as concrete evidence in the same way that answers supportive of an employment are treated by HMRC. In fact the reverse is likely to happen, whereby answers and explanations supplied to HMRC are often dismissed unless contemporaneous documentary evidence is supplied to back up the answers; this reflects the view that “if it isn’t written down it didn’t happen”. Evidence given to the House of Lords Select Committee records complaints of HMRC simply leaving out crucial evidence from status reviews such as unfettered substitution rights. HMRC officers fully understand the significance of such rights and, unfortunately some will try, if possible, not to recognise them.

Don’t allow HMRC officers to introduce their own definitions and criteria

The right to substitution, where present in an engagement, presents a difficulty for HMRC. It is a key indicator of self-employed status. HMRC officers may seek to blunt the effect of substitution rights by redefining them as not being “true” rights because the right has not been invoked or the officer presumes it will never happen. In one case, we were able to show circumstances in which substitution took place, but this was dismissed because it was in the year prior to the period that was under review despite the same terms and conditions existing throughout the engagement.

Don’t assume HMRC officers always know what they are doing

HMRC officers may speak with confidence and authority when presenting decisions, putting forward computations and threatening litigation. The reality is that some officers do not have an adequate knowledge of the legislation and relevant caselaw but instead base their approach on HMRC’s own guidance and policies, both formal and informal. In one case, the HMRC officer conducting an enquiry did not understand the IR35 rules, did not understand that HMRC had no discovery position, was out of time to make assessments and was incorrectly grossing up income for PAYE purposes and simply got some things wrong. The same individual was still prepared to use the threat of a contentious appeal hearing before the Tribunal to try and persuade an engager to settle on HMRC’s terms. We strongly recommend that everything that an HMRC officer puts forward as a recoverable liability at the conclusion of an enquiry should be checked via the relevant legislation.

Finally, many public sector employers avoided difficult decisions when operating the Off Payroll Working rules by simply treating all contractors as employees and operating PAYE. Evidence of this was put before the House of Lords Select Committee. This has caused serious difficulties for some agencies that can no longer recruit key service suppliers. Unless the private sector goes down the same route, there will inevitably be occasions where engagers receive enquires from HMRC into the operation of the new rules.

If you need help or advice on any HMRC enquiries or IR35 matters generally, please call one of our team.