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HMRC tightens scrutiny off payroll determinations
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HMRC ready to penalise off-payroll mistakes

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The arrival of the new tax year signalled the end of HMRC’s relaxed stance on penalties for incorrect IR35 employment assessments and other errors.

11th May 2022
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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.”

Replies (8)

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By Hugo Fair
11th May 2022 17:45

I feel that only our respected legal members can truly address the statement above which makes my blood run cold - that HMRC now see it as part of their remit to:
"question businesses .. on their hiring process for contractors, how they determine employment status and the process for deciding whether to outsource services."
With what authority do they do this?

This is particularly pertinent when the NAO reported that executives managing engagements are struggling to assess employment status (as are of course HMRC, tribunals and Uncle Tom Cobley)!

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By dmmarler
12th May 2022 10:59

Since when did you put a supplier on a payroll system? If you put anyone on a payroll system it means you are not sure about their status, and should probably have put them onto payroll at the outset. Come on John, either it is Jill or Joe Bloggs the plumber who is fixing something and will go away when the work is done (brings own kit, etc.) and who goes on purchase ledger, or it is a software person with intimate knowledge of your systems working for you on your system under your control on your premises - who is effectively on a short term employment contract- and who should be on payroll (with all the addtional HR work, pensions and NI costs that entails).

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By dmmarler
12th May 2022 11:07

Error504

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By Ben Alligin
12th May 2022 11:26

I have clients who used to work for the MOD, who post financial crash were told by MOD HR to form a company and report for work (same desk/same job/same location) on Monday following incorporation. This was done to comply with George Osborne's requirement for all government department to make savings in their budgets. They achieved this by shifting a lot of employees off payroll. I also know the NHS did something similar.

Interestingly HMRC have not gone after any Ministries at Whitehall and dragged them in front of the FTT etc. Different rules for government departments?!

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Replying to Ben Alligin:
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By Hugo Fair
12th May 2022 13:30

Actually that last sentence isn't true (although I sympathise with the sentiment).

A random selection of headlines in the last 12 months shows:
* Dept for Work & Pensions - in July 2021 DWP was issued with a £87.9m tax bill;
* Home Office - shortly afterwards the HO faced a £29.5m tax bill (with interest) for 'careless' IR35 failings + a £4m penalty;
* HM Courts & Tribunal Service - also then was handed a £12.5m tax bill.

There may be others (unreported or not noticed by me), but the 'interesting' fact is the paucity of detail on these cases - including how little appears to be levied in penalties as opposed to a bill for the back-dated deemed employments.

My bigger surprise (not) is that so far HMRC hasn't charged itself!

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Replying to Ben Alligin:
RLI
By lionofludesch
13th May 2022 10:35

Ben Alligin wrote:

I have clients who used to work for the MOD, who post financial crash were told by MOD HR to form a company and report for work (same desk/same job/same location) on Monday following incorporation. This was done to comply with George Osborne's requirement for all government department to make savings in their budgets. They achieved this by shifting a lot of employees off payroll. I also know the NHS did something similar.

Interestingly HMRC have not gone after any Ministries at Whitehall and dragged them in front of the FTT etc. Different rules for government departments?!

This just illustrates the level of thinking at Government level.

The way to cut down on Government spending is to reduce Government income.

"Lions led by donkeys" applies just as much today as it did 100 years ago but nowadays it's in the financial department.

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By ireallyshouldknowthisbut
13th May 2022 09:41

Is it just me who hates the insidious wording "off payroll"?

If it ain't an employee it ought not be on your payroll.

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Replying to ireallyshouldknowthisbut:
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By Hugo Fair
13th May 2022 14:33

No you're not on your own ... although it's equalled in my pantheon of hatred of HMRC's mangling of our language by many others - such as 'payrolling benefits'.

Nouns vs verbs, anyone?

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