Written by Simon Benford-Blows

IR35 reform implemented into the private sector in April of 2021, saw medium and large-sized businesses become responsible for determining the IR35 status of their contractors. These changes brought the private sector in line with the public sector, and we continue to see its impact on the flexible economy.

In what many will see as contradicting their published ‘soft landing’, HMRC has started off-payroll compliance activity across two sectors so far primarily in the Oil and Gas and Financial Services sectors prior to the ‘soft Landing’ 12-month period ending.

HMRC are writing to businesses that they believe engage contractors requesting the business to contact HMRC by a certain date to arrange an initial phone call.  This is the start of a compliance check, and the letter is the formal opening of the process so must not be ignored.  A follow-up meeting is then arranged at which HMRC will seek assurances that the off-payroll legislation is being implemented properly and with reasonable care.

Many businesses have been relying on HMRC’s publicised ‘soft landing’, wrongly concluding that no penalties mean no need to comply.  HMRC have explained that they will not apply penalties in the first 12 months unless there is evidence of deliberate non-compliance.  Ignoring the legislation will inevitably be seen as deliberate non-compliance! As such, it is important that end clients have the necessary protections in place and ensure up-to-date knowledge of relevant legislation and case law where possible. Contractors should also remain wary of any subsequent IR35 enquiries into previous tax years that could follow. So, companies should be aware they could fall foul if they have not adopted this correctly.

So, what are the three prime areas being investigated generally by HMRC?

• The hiring process for contractors working through their own limited company
• The process of deciding the employment status of these workers
• the process for deciding if any services you outsource are fully contracted out.

Whilst traditional employment status regulates sole traders rather than contractors working through personal service companies, potential changes to how traditional employment status is tested could change IR35 as well. This is because both legislations use the same status tests and operate in much the same way; IR35 is essentially a sub-legislation of traditional employment status.

The three key IR35 status tests (the right of substitution, control, and mutuality of obligations) were all derived from the traditional employment status case of Ready Mixed Concrete. As this is the case, it stands that any new employment status case law could go on to impact how IR35 is determined.

The next six months will be an interesting period where we suspect HMRC to increase its question of the private sector to make sure all the rules are being followed and appropriate fines no doubt will be levied for those found not