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HMRC confirms ‘soft landing’ in new IR35 guidance

To prepare for the new off-payroll regime taking effect for private sector engagers from 6 April, HMRC this week unveiled a document outlining its IR35 compliance strategy.

16th Feb 2021
Editor in Chief (interim) AccountingWEB
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Compliance guidance from HMRC
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The IR35 issue briefing on HMRC’s compliance approach was released on Tuesday as part of the department’s effort to ensure compliance with the new off-payroll working rules. The six-week lead time is an improvement compared to recent late and last-minute guidance documents, but then HMRC has had nearly three years to prepare its plans for the next phase of IR35.

Emphasising how it wanted to help people to pay the right tax through education and well-designed systems, HMRC confirmed it would adopt a light touch approach to penalties in year one. To dampen down contractor fears over retrospective adoption of the rules, HMRC vowed not to use information collected under the new regime to open any enquiries into returns for previous tax years – unless it suspected fraud or criminal behaviour.

Anti-avoidance measures

As the caveat indicated, the new guidance carries some stick alongside the supportive carrots. While it will not dig back through previous years, HMRC advised, “The scope of our compliance activity is not solely related to the application of the off-payroll working rules, but includes all arrangements that result in less tax being paid than should be the case, such as tax avoidance schemes that claim to avoid the rules.”

The department acknowledged that in response to the rules, some contractors operating through personal services companies will go on payroll and some will choose to operate through umbrella companies.

“Many of these will be commercial choices and will be fully compliant with tax law,” HMRC noted. “However, we will take action if contractors are engaged through artificial, contrived arrangements which are claimed to avoid the application of the off-payroll working rules or result in customers paying less tax than should be the case.”

Non-compliant businesses also run the risk of joining other naughty organisations on the department’s growing deliberate defaulters list “to encourage them to put their tax affairs in order”.

Responding on Twitter, TJW Management Consulting highlighted potential nervousness about the subjectivity of “deliberate non-compliance” and “reasonable care” when it comes to IR35 determinations and deductions. Accountants and taxpayers have already encountered problems with HMRC over allegedly careless errors in other areas, leading to a string of tax tribunal appeals.

The worry remains that the new rules will add to a case backlog that has swelled to unmanageable proportions during the pandemic.

Specialist team

IR35 has been a point of contention between contractors, their accountants and HMRC for more than 20 years, which may have prompted HMRC to deploy a specialist team to handle off-payroll working compliance activity.

The department said it would continue to work with representative bodies to monitor how the changes are affecting the contracting market.

The ongoing feedback about problems with off-payroll working arrangements also encouraged the department to create an education programme to help contractors prepare for the changes. The programme includes webinars, updated IR35 guidance and a dedicated support page for contractors.

Critical voices

But the education programme and emollient words were not enough to quiet industry representatives who continue to question the rationale behind the off-payroll working regime.

Qdos CEO Seb Maley called HMRC’s light touch approach a red herring: “Businesses won’t face penalties in the first year, but if a firm makes an incorrect IR35 decision or fails to meet its legal obligations, the tax office will still demand outstanding tax owed – and tax liability dwarfs penalties.

He continued: “Big promises have been made to clamp down on businesses that deliberately abuse the rules. But I have my doubts as to whether HMRC will actually deliver on these and put a stop to firms that blanket place contractors inside IR35. After all, no action was taken in the public sector following the rollout of similar changes in 2017.”

Like Maley, IR35 Shield CEO Dave Chaplin questioned HMRC’s commitment to enforcing the rules against engagers and pilloried the department's continuing use of the “unreliable” contractor employment status test (CEST).

“The gaping hole is what they plan to do if they see firms assessing incorrectly with the firm saying contractors are caught by IR35 when they clearly are not. Will HMRC step in and say so, thereby leaving a firm open to litigation from the contractor for loss of earnings?

“And given HMRCs poor track record in winning tax tribunals on status matters, are we likely to quickly see situations where HMRC litigate early? If HMRC inspectors use the woefully biased CEST tool, that could also exacerbate the numbers leading to litigation.”

Replies (29)

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Stepurhan
By stepurhan
17th Feb 2021 08:08

"...all arrangements that result in less tax being paid than should be the case, such as tax avoidance schemes that claim to avoid the rules."

I see that HMRC are once again going for aggressive language around tax avoidance. I'm no fan of outright abusive schemes. However, tax avoidance schemes rarely "claim" to avoid the rules. They apply the rules as written in a way which reduces tax. Maybe a focus on simplifying tax so there is less scope for manipulation within the rules would be better.

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Replying to stepurhan:
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By booksy
17th Feb 2021 11:55

On the simplification of tax suggestion. I don't think this is the answer. The answer is for HMRC to employ staff who have a good understanding of the existing tax rules and who want to help ie career choice. If this is expensive then the tax rules can be changed... (not simplified)

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Replying to booksy:
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By johnjenkins
17th Feb 2021 12:08

You're right. Tax rules can't be simplified. The OTS was supposed to do that. No, the tax rules need to be changed so that business can operate unencumbered. The best way to do that id to let agents take over the admin so that HMRC can go about investigating and collecting.

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By richards1
17th Feb 2021 09:52

Why does HMRC continue to use this word “customer”. None of us are customers as we cannot take our custom elsewhere. We are at best “taxpayers” or “potential taxed entities”, but never customers

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Replying to richards1:
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By unclejoe
17th Feb 2021 10:28

I think they have run out of ideas for confusing us on tax and want to confuse us on language as well. It seems to be happening all over the place. A young relative of mine was recently sacked from a warehouse job because they say he lied on his application form. He was born female, but lives his life as a man. His application form asked for his gender, giving one of two options male/female, so he put male. The error was discovered when he collapsed at work and medics unbuttoned his shirt. Of course, the application form did not want his gender, it wanted his sex! It is going to tribunal, if there is any justice I think he should win the case.

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Replying to unclejoe:
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By johnjenkins
17th Feb 2021 10:34

Most application forms now have binary added.

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By johnjenkins
17th Feb 2021 10:11

Reading between the lines this "soft approach" leads me to believe that HMRC have already started to backtrack.
Hopefully after this "specialist team" lose a few cases, the powers that be will realise that HMRC should not stick their noses in "employment status". IR35 has and never will be a REAL threat. Taking away a legal entity just to get more money. atrocious.
The answer to any challenge is to have a "contract for services" and make sure the working practices stick to the contract.

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Replying to johnjenkins:
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By Kemu
17th Feb 2021 11:00

johnjenkins wrote:

The answer to any challenge is to have a "contract for services" and make sure the working practices stick to the contract.


I agree with this part of your comment, but I don't agree with you that HMRC are likely to backtrack. The Treasury is convinced that contractors are all charlatans; the legislation, however odious and misguided, is enacted; and HMRC appear determined to apply it, however badly interpreted. The problem that genuine freelance contractors (PSC or S/E) face is that there are indeed many 'permalancers' who should really be staffers. They might even be better off if they were...
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Replying to Kemu:
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By johnjenkins
17th Feb 2021 12:03

The key phrase is "how the new rules have an effect on the world of subcontractors". IMV this gives HMRC an out if things aren't going their way.
I disagree with your thinking regarding "staffers". As I previously said there is no LAW about employment status, just guidelines. HMRC have tried to say who should be employed and who not. Employment status is a commercial decision, and who on earth came up with the words "disguised employment". There is no such thing. Of course HMRC need money so it'll be hell for the next year.

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By tayloralastair
17th Feb 2021 11:01

My understanding of this new regime (and please correct me if I'm wrong!) is that the rules surrounding the determination of whether a contract of engagement falls within IR35 or not have not actually changed, but what has changed is where the liability falls should HMRC successfully prosecute a case.
With this in mind, if parties to a contract were satisfied that the agreed Ts & Cs were sufficient to protect their arrangement from attack by HMRC under disguised employment rules then these same Ts & Cs are sufficient now.
As a consequence all this hoopla and panic that has swept in across HR departments is misplaced and engagements of subcontractors through their own Ltd Cos can & should continue with the usual diligence and inclusion of these key Ts & Cs.
I look forward to hearing from any dissenting commentators!

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Replying to tayloralastair:
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By Kemu
17th Feb 2021 11:30

Yes indeed. The new rules are changed to make a 'large' client responsible for creating and communicating a Status Determination Statement; making them liable if they get it wrong; and making them liable if they fail to issue the SDS. The rules remain pretty much the same. The key element is to document your status determination, and to keep a record of it, plus the reasoning behind your determination.

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Replying to Kemu:
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By tayloralastair
17th Feb 2021 12:40

This is my understanding too. In my view it should always have been the 'large' client who was responsible for picking up the liability as frequently they held the balance of power in negotiating a contract with a consultant, and therefore they would usually be responsible for including any clauses that would create difficulties with an HMRC enquiry into status.

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Replying to tayloralastair:
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By Kemu
17th Feb 2021 17:12

Of course, if you're contracting with a 'small' client, it is you the contractor, who still has the responsibility to determine the status of the contract - and the liability if you (in the opinion of HMRC) get it wrong.

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Replying to tayloralastair:
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By IANTO
18th Feb 2021 08:27

" if parties to a contract were satisfied that the agreed Ts & Cs were sufficient to protect their arrangement from attack by HMRC"

Until the advent of IR35 all contracts were so. They were constructed so as to avoid any contractual nexus between the contractor and the client. This then prevented any successful claim in the ET, irrespective of the reality of the engagement.

The iniquity of IR35 is that it allows the FTT to ignore that legal structure and look directly at the relationship, whereas this isn't allowed in the ET. IR35 talks about constructing an "imaginary" contract which may take into account other aspects of the real contract, but removing any provisions which prevent any contractual nexus between the contractor and the client.

I raised an interesting point recently with major players in the IR35 field. IR35 is the law of the land and the FTT uses it. So why shouldn't it be used in the ET? How can the legal system tolerate a law which can be used in one court and not another? Are there circumstances where criminal law isn't allowed in civil law? Just a thought!

If IR35 were to be allowed in the ET, I guess we'd see many more successful employment claims there. Generally, I've not seen much attempt by representative organisations to use any "unusual" approaches against IR35, and maybe, just maybe, if they had approached the issues more aggressively, then perhaps we might not have found ourselves in this position now.

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Replying to IANTO:
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By johnjenkins
18th Feb 2021 10:28

IR35 should have been challenged right from the outset. Taking away a legal entity in certain circumstances? If they had just stuck a tax on dividends there and then, a lot of time and money wouldn't have been wasted. Yet here we go again. Pathetic.

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Replying to johnjenkins:
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By IANTO
18th Feb 2021 11:03

"IR35 should have been challenged right from the outset"

Absolutely! and I did my bit to challenge it, despite fierce opposition from some quarters and a lack of support from representative organisations. I did benefit personally, but I was attempting to bring an element of clarity to the issues for others also.

I still maintain that an "inside" judgement in the FTT should then be used in the ET (and I acknowledge the timing issues), where I contend that the ET would be unlikely to come to a different conclusion, if it were only for political reasons.

Considering the timing issues, it's interesting that it appears that none of the high profile TV presenters who have fallen foul of IR35 and who are still contracted to their clients, have taken their cases to the ET. Being my usual suspicious self, I guess that politics are in play here. We haven't even heard if or how the tax bills have been paid either. More political suppression of the details I guess!

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Replying to IANTO:
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By johnjenkins
18th Feb 2021 11:36

"Lack of support from our bodies" spot on. They couldn't even put pressure on to get an extension for the tax return deadline. The only reason why HMRC are waiving the penalty until end of Feb is because Jimbo said covid would be treated as a reasonable excuse for late submission. Nobody believed him so like, myself, many submitted estimates to cover. He didn't want to go through the FTT process. So isn't it time our bodies put REAL pressure on HMRC to ditch trying to decide "employment status". We've got no pressure from the EU now so let's go for it.

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By tayloralastair
17th Feb 2021 11:07

My understanding of this new regime (and please correct me if I'm wrong!) is that the rules surrounding the determination of whether a contract of engagement falls within IR35 or not have not actually changed, but what has changed is where the liability falls should HMRC successfully prosecute a case.
With this in mind, if parties to a contract were satisfied that the agreed Ts & Cs were sufficient to protect their arrangement from attack by HMRC under disguised employment rules then these same Ts & Cs are sufficient now.
As a consequence all this hoopla and panic that has swept in across HR departments is misplaced and engagements of subcontractors through their own Ltd Cos can & should continue with the usual diligence and inclusion of these key Ts & Cs.
I look forward to hearing from any dissenting commentators!

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Replying to tayloralastair:
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By IANTO
18th Feb 2021 12:42

"As a consequence all this hoopla and panic that has swept in across HR departments is misplaced and engagements of subcontractors through their own Ltd Cos can & should continue with the usual diligence and inclusion of these key Ts & Cs."

The problem is that HMRC has won the propaganda war so far and HR departments are risk averse. HMRC even created the term PSC, which has no legal status. Only the term IR35 has stuck so far.

It has been said that as the FTT can only look at one individual case, then any judgment there cannot be automatically applied to others contracting for the same client. So the financial risk must be very low, even if an individual lost their case in the FTT.

What must be strongly represented to clients is that the financial risk of ET claims is exponentially greater than any FTT challenge by HMRC. However, that's another propaganda war that only the representative bodies can undertake. As I've posted elsewhere, it's interesting to note the fate of high profile TV presenters with regards to the FTT and the ET.

However, in the past, contractor organisations have not wanted to rock the boat and preferred to sup tea and eat biscuits with HMRC. That approach seems to have led to the demise of certain individuals in that environment!

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By cfield
17th Feb 2021 11:27

It's amazing how many end-clients now refute the control and substitution clauses in a typical agency contract by saying they're not in the hypothetical contract. In other words, that they don't agree to them. In that case, what were they doing in the agency contract in the first place? Did the agency just invent them without telling their client or was the client happy to accept/ignore them at the time?

I've also noticed how they always somehow manage to tweak their answers in the CEST tool to produce an in-scope decision and thus avoid any risk of HMRC enquiries. The last one I looked at said they had the right to move the contractor to work not originally agreed in the contract. Really? It was news to him! A different answer may well have produced an out-of-scope decision.

We can only wait for the labour market to get back to normal so that contractors are back in demand and those firms who insist on in-scope contracts find themselves at the back of the queue. Only then will we find out how successful HMRC have been in side-lining the courts and forcing people into IR35 even though many of them are genuinely self-employed.

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By tedbuck
17th Feb 2021 12:00

It all really comes back to bad law enacted by HMG. Is it all that different now that we have dividend tax. It is still marginally better to be a contractor tax wise but there isn't a huge amount in it and the loss of employee's benefits and increased costs of working through a company a lot of which ends up in HMG's hands as tax from accountants and the like not to mention the savings from not having to support them as unemployed means that HMRC's figures of the losses they think they suffer are well inflated.
Governments are short-sighted and have tunnel vision ( a bit like SAGE) in that they can't see beyond the immediate effects of their actions. Remember a chap called Gordon Brown who was at the start of this farrago. He introduced a £10,000 tax free zone for small companies to creep to the unions, I assume, and what happened? All self employed people decided to form companies.
Then he had another bright idea and abolished ACT thus depriving pension funds of a big chunk of income and lo and behold there were shortages in the funds when people came to retire so exit final salary schemes (Not for civil servants and MPs though because we pay for them out of our taxes which is why they are so keen to get more.) So what did this genius then do? He invented IR35 which has been about as successful as he was and twenty years later it is still incompetently administered, still wasting everybody's time and with little reward to the Treasury. Yes - Iknow there have been some high profile wins for HMRC which have greatly rewarded the legal teams on both sides but the net gain? Difficult to see that it has been worth it.
Time for a complete rethink on the whole tax system which is just not fit for purpose and has, I understand, risen to the highest level for years so that HMG can throw money at fancy projects like digitalisation to waste more of everyone's time and money. I can just see my elderly clients embracing digitalisation as a means of simplifying things for the future. Not a chance!

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By North East Accountant
17th Feb 2021 14:03

Another 10 pages of guff from HMRC......

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By DKB-Sheffield
17th Feb 2021 17:15

As previously mentioned, the IR35 criteria have not really changed... other than to to shift the liability. However, this is causing so many blanket responses from large organisations - many of whom are adopting the approach that EVERY contractor is in-scope. Furthermore, when challenged, they send a copy of a CEST which bears no relation to the actual contract or contractor.

An example dates back to the aborted rollout in 2020 but still highly relevant now! A consultancy client of mine providing ad-hoc (and infrequent), relatively low-value, IT-related support (team of 6 staff - substitution possible) to a "large" client (and countless others beside). When challenged, they stated there was an exlusivity clause, but what they meant was that there was a confidentiality clause. Despite being challenged, they refused to back down stating that their head office had directed that all contractors are in-scope - regardless of circumstances. My client ended up walking away!

Rather than spending the money on a specialist team to tackle compliance, HMRC really should concentrate on educating the "employers" and their own "officers" in what compliance is! If this rollout is to be successful, it must be done properly. The contractor market is ESSENTIAL to the UK economy. Contractors (I would say the majority) are not all disguised employees, every company is not a PSC, and every sole trader is not a "worker". Any suggestions otherwise, or any attempts to apply blanket treatments can only be a bad thing IMO.

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Replying to DKB-Sheffield:
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By johnjenkins
18th Feb 2021 10:12

"worker" is an EU term. We are not in the EU anymore. So let's get back to "self-employed or employed (whether by large company or your own one man band)".

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Replying to johnjenkins:
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By IANTO
18th Feb 2021 11:30

yes, and outlaw the term Personal Service Company also! They don't exist in law.

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Replying to johnjenkins:
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By IANTO
18th Feb 2021 11:35

yes, and outlaw the term Personal Service Company also! They don't exist in law.

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Replying to johnjenkins:
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By tayloralastair
19th Feb 2021 11:19

Not sure the Supreme Court agrees with your view on the 'worker' term John.

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Replying to johnjenkins:
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By tayloralastair
19th Feb 2021 11:19

Not sure the Supreme Court agrees with your view on the 'worker' term John.

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Replying to tayloralastair:
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By johnjenkins
19th Feb 2021 11:40

Yes I do know that, unfortunately it has now become part of "employment status", but Government now has the mechanism to reverse all those stupid little annoyances that have come from the EU. Hopefully Lord Frost will come up with some sensible ideas.

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