HMRC is sending out 'nudge' letters to contractors in sectors where it believes there is a high risk of non-compliance with the current IR35 rules. This includes the pharmaceuticals industry as GSK contractors found out last week. Could this latest activity be a prelude to a new disclosure facility or amnesty?
To recap, the IR35 rules were originally introduced in 2000, the goal being to ensure that people working like employees (but who operate via an intermediary, such as a personal service company) pay broadly the same tax and national insurance as an employee.
In response to perceived widespread non-compliance, HMRC introduced reforms applicable to the public sector in April 2017 which shifted the responsibility for assessing status from the contractor to the end-user of the services. These rules will be amended and extended to the private sector from April 2020.
HMRC has previously stated that it would not carry out targeted campaigns into previous years when in April 2020 individuals start paying employment taxes as deemed employees for the first time. However, HMRC did not rule out undertaking routine enquires.
The recent HMRC letters tell contractors that, if they accept their contract was caught by IR35 rules, they should calculate their employee payroll tax and national insurance contributions for the 2018/19 tax year and make payments by 22 September 2019. If they dispute this, HMRC has asked for evidence by 19 September 2019.
Other letters ask both the engager and the contractor around 50-60 questions each about the nature of the relationship they have in order to undertake a review of the position.
This latest campaign will increase concerns among the contractor community that suddenly becoming a deemed employee from April 2020 could result in investigations into earlier years.
Perhaps they are right to be worried. From HMRC's point of view, they can go back six years under the disclosure assessment rules and collect penalties. By 2023-24 HMRC also need to collect some of the estimated £1.3bn a year which is lost due to non-compliance.
With up to 170,000 personal service companies likely to be affected by the new off-payroll rules from April 2020, it's possible that HMRC will offer a disclosure facility to encourage compliance.
Generally, such disclosure opportunities are preceded by a large information-gathering exercise, so we may feasibly see an increase in HMRC attempts to gather information under its statutory powers data from the private sector and public sectors.
Once such a facility is up and running if people do not take advantage, HMRC will use the information gathered to conduct follow up work including tax investigations and prosecutions, so watch this space!