HMRC starts IR35 compliance checks in financial services, oil and gas sectors
The changes to off-payroll working, commonly known as IR35, came into effect on 6th April 2021
HMRC has begun formal checks with several firms in the financial services and oil & gas sectors, to review their compliance with the revamped IR35 rules.
The assessments are the result of 'changes in engagement models' emerging within these sectors, which are known to heavily rely on personal service and limited company contractors.
"We are therefore contacting client organisations in these sectors initially to confirm that they are applying the off-payroll working rules correctly," an HMRC spokesperson told Computer Weekly.
The changes to the off-payroll working (OPW) rules, commonly known as IR35, came into effect on 6th April 2021, making medium and large-sized private and public sector organisations responsible for determining the employment status of the contractors they engage, for tax purposes. In other words, organisations now have to decide whether the contractors they use should be taxed as off-payroll workers or permanent employees.
Under previous IR35 rules, which were in place for nearly 20 years, contractors were allowed to self-declare their tax liabilities; that is, whether they should be taxed in the same way as salaried workers or as off-payroll employees.
That system was open to abuse, HMRC believed, because contractors could intentionally mis-classify their working arrangements with their employers to curtail their tax liabilities.
Last week, the Institute of Chartered Accountants in England and Wales (ICAEW) reported that HMRC had begun sending letters [pdf] to firms in specific sectors, seeking information about their IR35 compliance procedures.
The letter asks recipients to arrange a formal meeting with HMRC officials to discuss how the business has implemented the revamped IR35 rules. It seeks to understand more about the organisation's process for engaging contractors, and how they determine whether IR35 applies.
HMRC had said earlier that it would not punish employers for IR35 mistakes made in the first 12 months, unless there is an indication of intentional non-compliance.
So far, the letters have been sent to businesses within the financial services and oil & gas sectors, although experts believe compliance checks could begin in other sectors as well in the coming months.
ICAEW says the 'challenge for many larger organisations is that contractors invoice for their work and are handled by purchase ledger teams with the risk that status checking is overlooked by human resources and payroll teams'.
These compliance checks follow a number of large settlements by the public sector, which has been subject to the OPW rules since 2017.
The Department for Work and Pensions and the Home Office faced £87.9 million and £33.5 million tax bills, respectively, for compliance failures dating back to the roll-out of similar reforms in the public sector in April 2017.
Dave Chaplin, CEO of contracting authority ContractorCalculator, told Computer Weekly it is a good sign that HMRC is taking proactive measures to ensure the private sector does not fail to comply with new IR35 rules.
"The reforms only came in six months ago and already they are starting to look at sectors to check they're doing it right, because if it's just a few mistakes that can be easily fixed, it's much better to find out earlier rather than later," Chaplin added.