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.
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.
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.
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.
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.”
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