Off-payroll working: one year on

As we approach the one-year anniversary of the new IR35 rules, and with the extension into the private sector and the end of HMRC’s ‘soft-landing’ period, end-users of such workers’ services should check they are being compliant.

From 6 April 2021 medium and large private sector end-users had new obligations under the off-payroll working (or IR35) rules when a worker provided their personal service via an intermediary, most commonly a Personal Service Company (PSC). The rules were also amended for those in the public sector. From April 2021 such end-users have been required to:

• assess whether the worker would be deemed to be an employee;
• issue a formal Status Determination Statement (SDS); and
• implement a formal Status Disagreement Process.

This applies even where other parties (eg agencies) sit between the end-user and the worker’s PSC in the labour supply chain.

Where the end-user determines that the worker would be deemed an employee (ie they are ‘inside IR35’), the fee payer needs to account for tax and NIC under PAYE when paying the worker’s PSC (including employer’s NIC and, where relevant, the Apprenticeship Levy).

What is the ‘soft-landing’ period?

Last year HMRC confirmed they would take a ‘light touch’ approach to penalties for the first 12 months for the private sector in relation to the new rules. This light touch to penalties only applies where there is no evidence of deliberate non-compliance with the rules.

This certainly wasn’t a green light for private sector end-users not to be compliant with the rules in the first year, but it is an acknowledgement by HMRC that businesses might need time to comply with these complex changes. The HMRC approach to compliance was set out in their document here.

Where non-compliance with the rules by a private sector end-user in the first-year results in underpaid PAYE, NIC and Apprenticeship Levy liabilities, HMRC can still seek to recover those liabilities together with interest charges from the end-user. The light-touch only applies to penalties.

As we have seen from recent reports of large public sector settlements the light-touch does not apply to them and non-compliance can result in underpaid PAYE, NIC, and Apprenticeship Levy liabilities, as well as interest and penalties.

What happens if an end-user gets it wrong?

End-users who incorrectly classify workers working via an intermediary as being outside IR35 can be held liable for the PAYE, NIC and Apprenticeship Levy due if HMRC successfully challenge the worker’s status and reclassify them as being inside IR35.

There is currently no mechanism for offsetting tax paid by an individual’s intermediary (nor any tax paid by them on dividends drawn from that company) against the end-user’s PAYE, NIC and Apprenticeship Levy liabilities.

Subject to the facts of each case, an end-user can also be held liable for PAYE, NIC and Apprenticeship Levy liabilities where processes and procedures are not robust enough to support other aspects of IR35 compliance, including (for example) where:

• The end-user assesses the worker’s status as inside IR35 but fails to issue a valid SDS to the worker and the feepayer; or
• A worker appeals against an end-user’s decision in an SDS, but the end-user fails to deal with that within the required time frame for doing so.

Where there are underpaid liabilities HMRC will also charge late payment interest and penalties (but noting the light-touch on penalties for the first year in the private sector). The HMRC penalty charged will depend on the behaviour leading to the error and can be mitigated by exercising reasonable care, and for telling HMRC about errors, helping HMRC work out what the extra tax and NIC due is, and giving access to HMRC to check the figures.

In addition to financial penalties, it’s important to also factor in the corresponding risks of reputational damage.

Are HMRC checking compliance?

The public sector rules have applied to payments made after 5 April 2017 and HMRC has been checking compliance, with some large settlements reported.

In addition, despite the soft-landing period for the private sector HMRC have already started checking compliance in certain sectors.

Many organisations therefore might have received letters from HMRC asking the recipient about their IR35 processes and telling them to contact HMRC by a certain date to arrange a telephone call on IR35.

Where received, these letters should not be ignored as they could be the start of a compliance check.

What can we be doing now?

We expect HMRC to increase the level of compliance activity in this area. Now is therefore a good time to ensure your IR35 procedures and processes are still suitable and facilitate compliance with the rules. In particular end-users may want to:

• Undertake labour supply chain due diligence to ensure that all engagements falling within IR35 are still being identified
• Ensure internal teams and hiring managers have sufficient ongoing training to raise awareness of IR35 and reduce the risk of non-compliance and demonstrate reasonable care to comply
• Consider revisiting status determination statements previously issued in light of potential updates to the working arrangements and the latest updates in case law.

For more information, or if you have any questions or concerns, please contact your usual RSM contact, Lee Knight or Susan Ball.