The Off-Payroll Worker legislation has given rise to a number of challenges for businesses seeking to utilise the contractor workforce. In this article Lewis Howarth, a Senior Manager in BDO’s Global Employer Solutions team, summarises HMRC’s approach to enforcing compliance and the challenges for the tech, media and telecoms industry.
It is two years since the ’IR35’ legislation, relating to the engagement of off-payroll workers (contractors) was revised. From April 2021, medium and large-sized organisations became solely responsible for determining whether a contractor(s), engaged via a Personal Service Company (PSC), would be considered an employee if it were not for the existence of the PSC in the contractual chain.
In dealing with the new legislation, technology, media and telecoms organisations have had to adapt quickly given the volume of contractors engaged within the industry. From presenters to computer programmers, the industry is heavily reliant on a specialist and often fluid workforce to ensure delivery of products to market. With this comes a series of unique challenges and issues in maintaining tax compliance, whilst trying to minimise disruption to commercial operations.
This article addresses how HMRC is seeking to enforce compliance by engagers, the challenges faced by businesses in complying and how to prepare for a HMRC compliance review.
HMRC’s Approach to Compliance
For the first tax year (2021/22) of the revised legislation, HMRC agreed to take a light-touch approach to compliance. This was a welcome reprieve for many businesses who were rightly attempting to be compliant, albeit amidst the pandemic and its aftermath.
As we enter the 2023/24 tax year, HMRC are stepping back from the light-touch approach and are ramping-up their compliance activities. Despite this, where a business can demonstrate they’ve taken 'reasonable care’ HMRC are unlikely to seek penalties if anything has gone awry. Reasonable care would typically include the creation of robust processes, policies and evidence to suggest that these are actively monitored.
Most recently we have seen HMRC issuing “nudge letters” to employers requesting numerous pieces of information regarding their engagement of contractors.
HMRC information gathering by nudge
HMRC’s nudge letters give businesses with just 30 days to respond to requests for information such as:
- How many contractors do you engage either directly on a self-employed basis or via a PSC?
- Have you confirmed the employment status of those engaged and have supporting evidence.
- As a result of employment status assessments concluding “deemed employee” status, how many contractors have been added to the payroll?
While HMRC suggest this approach is intended to be supportive of businesses, receipt of these “nudge letters” can be a challenging and expensive exercise for businesses to respond to. Reasons for this include:
- The time required to collate this information and respond to HMRC’s request (not responding to a nudge letter may not be terminal, but certainly is a high risk strategy).
- The discovery of any errors and subsequent corrections is likely to take more time and give rise to income tax and NIC liabilities.
- HMRC will seek interest on any PAYE and NIC underpayments, with the possible addition of tax-geared penalties unless reasonable care has been demonstrated in all aspects of their approach to IR35 compliance - which includes having robust processes and policies in place.
- If there are penalties, these will be higher following a nudge letter from HMRC as any corrections will be classed as ‘prompted’ disclosures rather than ‘unprompted’ corrections.
Managing your risk
For those businesses actively monitoring their compliance with the legislation, a nudge letter is likely to cause some concern as policies and processes are externally reviewed for the first time. There are several ways a business can start to prepare and mitigate the risk of a negative review and at the same time demonstrate reasonable care summarised as follows:
1. Identifying contractors
Proactive monitoring of supply chains, to identify contractors, should form part of an ongoing review process to enable the management of risk before a problem arises. Where such processes are established, this would also allow the business to prepare a quicker and more informed response to any “nudge letters” received from HMRC.
2. Processes and Controls
Establishing a clear process and obtaining stakeholder buy-in is often key to managing the tax risk effectively. Any process/control(s) established need to be robust insofar as they cover most day-to-day scenarios, yet flexible enough to enable exceptions as and when they occur.
3. Training
The engagement of contractors within the business often involves numerous stakeholders. Therefore, it’s vital that adequate training is rolled-out and continues to be available to ensure that all employees who may engage a contractor understand the process and related risks of non-compliance.
4. Internal reviews
Businesses should be periodically reviewing their processes to ensure compliance internally. This can involve reviewing whether employment status assessments have been completed accurately and consistently, and ensuring they’re reviewed periodically over the course of an engagement. In addition, it is important to confirm if payroll obligations have been met, whether that be internally or via a 3rd party.
5. Policies
Finally, businesses should develop policies which demonstrate a clear understanding of the legislation, how the business applies the legislation to its specific needs and identify the key internal stakeholders. Maintaining documentation is key to implementing a structure to enable the business to demonstrate that reasonable care has been taken in the event of any future review by HMRC.
Pre-empting a nudge from HMRC
For those organisations that are not up to speed with at managing their risk, engaging an external party to carry out a risk review before HMRC does send a nudge letter is often a sensible move.
An external review can help identify shortcomings in the organisations approach so that they can be put right and any inherent PAYE and NIC liabilities paid voluntarily. Not only does this reduce the risk of significant financial penalties arising following a nudge from HMRC, but it will give the organisation a clean bill of health - which can be so important if a sale of the business or other corporate transaction is envisaged.
Key Takeaways for Technology, Media and Telecoms companies
- HMRC is aware of the challenges that many businesses have faced in complying with the off-payroll labour rules and that there may be rich pickings for its enforcement activities – organisations that are not getting up to speed now, may face some hefty costs in the future.
- HMRC have won and lost a number of high-profile tribunal cases, particularly in the media industry - highlighting the complexities of the legislation.
- The UK’s International Technology Strategy presents a great opportunity for technology companies to develop and expand. To do so will no doubt require access to the contractor market which in turn creates risk without adequate policies and processes in place.
Click here to watch our short animation which provides a summary of the recent IR35 reforms and hurdles to look out for.
Please fill out the following form to access the download.