We have now reached the end of HMRC’s soft-landing period for the “off-payroll working rules,” also known as IR35. This means HMRC has moved from its educational phase to enforcement of the new legislation. As a result, many businesses are now reassessing their solution, seeking advice and reassurance that they are meeting HMRC’s reasonable care threshold. So, what should businesses be looking for when evaluating their compliance?
What does end of soft-landing mean?
The ‘soft-landing’ period meant that medium and large businesses wouldn’t be penalised financially for non-compliance up until April 6th, 2022. Many organisations have seen this a reason to delay activities over the past year that would help ensure IR35 compliance, however we are now seeing businesses looking to reassess their solution, especially those that have not reengaged with IR35 since their initial audit.
Although no tribunals have been prosecuted in the private sector as yet, HMRC could now start investigations into any outstanding tax liabilities which have not been paid during the soft landing year. Investigations will begin with letters sent out to organisations that use contractors requesting evidence of compliance, followed with a full investigation in the event of any discrepancies. A successful prosecution in court would result in unpaid tax being claimed back and fines being issued for non-compliance. Not only could this have a lasting and, in some cases, a trajectory changing impact, but it also presents legal costs as well as reputational damage within the market.
Reassessing your solution
Brookson Legal’s latest research report Reassessing IR35: The unspoken opportunity for growth uncovered concerning statistics that imply many businesses are over confident in their IR35 solution. In fact, 87.6% of midsize to large companies believe they understand the “reasonable care” requirements set out by HMRC and are confident they’re compliant, but many have relied upon questionable IR35 solutions.
47% of businesses relied upon HMRC’s Check Employment Status Tool (CEST) for contractor status determinations, while 42% relied upon other automated online tools. However, online automated tools such as CEST have been found responsible for recent public sector fines. Many have found CEST to be confusing and unreliable, and as with any automated tool, it is only as useful as the level of skills and knowledge of the person using it.
Positively 80% of respondents stated they plan to review their IR35 solution before 2022, so what can businesses do to ensure their solution is compliant and meets HMRC’s guidelines?
Mock investigations and supply chain audits
As organisations move onto the next step in their IR35 journey, reviewing contracts and implementing staff training should be key activities – both of which have been highlighted by HMRC as crucial parts of the ongoing ‘reasonable care’ responsibility. This is driving an increase in mock investigations and supply chain audits, as hirers begin to stress test their solutions and ensure that they are confident and compliant in the case of an HMRC investigation.
Mock audits allow businesses to see potential pitfalls and pain points in their solutions, but we are seeing common challenges and mistakes during these stress tests. For example, organisations often have misinformed people carrying out IR35 assessments meaning that the status assessors are not given accurate working practices information. The person carrying out the assessment should deal with the contractor on a day-to-day basis, in order to give accurate and honest answers.
Another common issue is that businesses do not understand questions asked during the audit and, rather than asking for support, they will answer questions how they think they should be answered which can cause contradictions and give an inaccurate result. In this instance, it’s vital that businesses seek expert advice instead of attempting to a response and potentially putting themselves at risk.
Next steps
As HMRC transitions into enforcement mode, businesses should be taking action and reviewing their IR35 approach. By engaging with an independent expert to carry out a mock audit, organisations can uncover any hidden issues so they can be resolved and the business can then be confident that they have a compliant IR35 solution in place.