HMRC ready to penalise off-payroll mistakes

Reports have been coming in from IR35 experts and specialist advisers that HMRC has been sending out compliance letters to large businesses in sectors such as oil & gas and financial services querying their application of the off-payroll rules.

HMRC’s April bulletin for employers spelled out that the 12-month moratorium on collecting penalties for mistakes applying the off-payroll working rules would come to an end.

“This first 12 months has now ended, and penalties may now be charged on any inaccuracies relating to the operation of the rules that occur after April 2022,” the guide advised, adding it would continue contacting engagers to check the rules were being applied correctly.

The changes to the off-payroll working rules in April 2021 moved responsibility for determining a contractor’s employment status for tax purposes from their personal service company (PSC), to any large, medium-sized or voluntary organisation that engaged them.

Contractors who work for small client organisations, however, will still be responsible for applying the rules for each of their engagements.

Traps for the unwary

According to Energy Voice, recent HMRC compliance letters questioned businesses in the sector on their hiring process for contractors, how they determine employment status and the process for deciding whether to outsource services.

As with anything to do with IR35, the new rules are not straightforward. 

The National Audit Office (NAO) report into off-payroll working found that when the off-payroll rules were introduced for public sector organisations, the executives managing engagements struggled to assess employment status. 

Subsequent notes to departmental accounts and government agencies for 2020/21 racked up a total of £263m in penalties paid or in additional tax due for failing to administer the reforms correctly, the NAO found.

Some of the issues stemmed from difficulties interpreting and applying results from HMRC’s online Check Employment Status for Tax (CEST) tool, which has been dogged by persistent criticism about its reliability, including an adverse verdict at the upper tier tax tribunal.

Engagers who attempt to avoid any off-payroll complications by issuing blanket status determinations on the status of their contractors run the risk of failing to meet the obligation to take reasonable care by assessing individual contracts. 

Payroll software flag

As well as documenting their compliance processes adequately, HMRC requires organisations engaging contractors to include an “off-payroll worker” indicator within their payroll software.

This would be a good time to check that the payroll software being used to pay PSCs and other intermediaries includes this data field, and that it is being used correctly. 

“If you have used this indicator incorrectly, please make sure this is corrected urgently on a corrective full payment submission for the relevant period,” HMRC advised.

In line with its initial soft-landing approach, HMRC said in its employers’ bulletin that it would continue to try to help organisations comply with the off-payroll working rules – but would clamp down more firmly on those it found were deliberately breaching the rules.

Brookson Legal’s head of legal services Matt Fryer confirmed that the department’s shift towards tougher enforcement was beginning to have an effect: “With HMRC’s soft landing coming to an end, we’ve seen the focus very clearly put back on IR35,” he said.

“Many businesses have asked us to reassess their solution in recent months. This is especially true for those organisations who have not engaged with IR35 since their initial audit, leading them to seek advice and reassurance around meeting HMRC’s reasonable care threshold.”