When HMRC introduced changes to the ‘off-payroll working rules’, commonly known as IR35, in April 2021, it promised the private sector a 12 month ‘soft-landing’.
We’re now quickly approaching the end of this grace period and the Government’s transition from education to enforcement, with some compliance checks already taking place in the oil and gas sector.
The industry relies on skilled engineering contractors, so it is vital businesses are prepared for this shift to ensure project continuity and business growth, while avoiding costly tax bills and fines. A year on from the initial deadline, are businesses ready for greater scrutiny?
Rose-tinted glasses
The new rules effectively move the responsibility for determining contractor employment status, as well as ensuring that the correct taxes are paid, from the contractor to the end hirer. The past 12 months have seen the private sector getting to grips with this change, but how many solutions that have been implemented are quick fixes and how many oil and gas companies really understand their new responsibilities?
To investigate the impact the legislation has had on businesses and contractors, the House of Lords Finance Bill Sub-Committee is undertaking a review of the ‘off payroll working rules’. Evidence submitted by HMRC states that most clients find the new IR35 rules ‘easy’ and ‘reasonable to apply’. This view differs to those voiced by some contractors and businesses in the media.
It is no surprise that HMRC is viewing feedback with rose-tinted glasses, but when Brookson Legal conducted research with 500 business leaders for Reassessing IR35: The unspoken opportunity for growth, it is possible to see how this could be deemed an accurate view of the legislation’s roll out. Data from our report found that 87.6% of medium to large companies believe they understand the ‘reasonable care’ requirements set out by HMRC and are confident they’re compliant.
A false sense of security
In isolation, this is a positive statistic and is likely a fair representation of a proportion of businesses that have correctly implemented robust IR35 solutions. However, when exploring the multiple solutions companies have applied, it becomes clear that this confidence may be misplaced.
The most common compliance risk lies in reliance on HMRC’s online tool Check Employment Status for Tax (CEST). The Government says that it stands by this too. However, many of its own departments that relied upon it, following the introduction of the same rules in the public sector, have received multi-million-pound tax bills for inaccurate status determinations.
In our survey, 47% of business relied upon contractor statuses determined through the use of CEST, while 42% relied upon other automated online tools which share similar risks. The tool can only be accurate if the person inputting the data fully understands employment status and contract provisions and working practices. Ongoing training is required if an automated tool is being used.
More worrying, however, is that around a third of businesses asked agencies (31%) or contractors (35%) to make IR35 status determinations for them. This is against HMRC guidance stating status determinations are now the responsibility of the end-hirer, who could ultimately be deemed liable for any outstanding tax. Outsourcing responsibility could be a false economy, burying compliance risk in the supply chain.
These cases may not be representative of all hirers. As highlighted by the CBI’s evidence to the Lords Committee, many businesses have invested considerable time and resource into implementing IR35 correctly, but it’s vital that all organisations review this ahead of April to check their understanding of ‘reasonable care’ is correct.
The end of the soft-landing period
HMRC has already confirmed that compliance checks are underway within the oil and gas sector, due to concern about how businesses are adhering to the new rules. This should be a signal for directors with responsibility for contractors to review IR35 processes to avoid fines or tax bills.
It is worth reflecting that fines are not the greater liability here. The potential scale and impact of tax recovery for a large contractor workforce has been highlighted in the public sector. In December, Defra became the fifth department to fall foul of IR35 rules and face a tax bill of £48 million (excluding fines). For a private sector business, tax bills of this size could have a significant and potentially irrecoverable impact.
For oil and gas companies that get their new IR35 responsibilities right, however, the tax framework can provide a solid foundation for access to vital contractor talent.
It’s time to get IR35 right
With only two months to go until the soft-landing period comes to an end, now is the time for all organisations to review their IR35 approach. This will allow them to continue to hire confidently, using IR35 as a force for good – supporting both talent attraction and business growth.