Off-payroll working rules – A salutary warning for the private sector
In its recently published annual report, the Home Office (HO) declared that HMRC had concluded there were a number of instances where it had not complied with the off-payroll working rules (IR35) that came into force in the public sector from 6 April 2017. As a consequence, the HO was required to pay £29.5M in tax and national insurance contributions plus interest.
Furthermore, HMRC concluded the HO had been ‘careless’ in its application of the rules and charged a £4M penalty. HMRC agreed to suspend the penalty for 3 months provided the HO improved its governance, training, monitoring and assurance processes through the life-cycle of its contracts subject to the rules.
The HO is not the only government department to pay additional tax as a consequence of non-compliance. The Department for Work and Pensions (DWP) had to settle £87.9M.
What does this mean?
The off-payroll working rules were recently extended to medium and large-sized private sector businesses from 6 April 2021, four years after their introduction in the public sector. The above liabilities incurred by government departments should serve as a warning of the importance of getting things right. HMRC will at some stage open enquiries into the application of these rules in the private sector. Businesses that enter into engagements with relevant contractors and have not implemented robust governance, training, monitoring and assurance processes are already at risk of a costly exposure to tax and national insurance contributions liabilities plus interest and penalties.
The HMRC enquiry into the HO’s application of the rules was opened in 2018 and took around three years to reach its conclusion. One of the more notable disclosures in its annual report was that out of 141 ‘new engagements, or those that reached six months in duration between 1 April 2020 and 31 March 2021’, 90 were changed to deemed employment as a result of a ‘consistency review’ in that accounting year. This is more than 60%.
The determination of whether an engagement results in deemed employment can be a very subjective exercise, dependent on a combination of factors. A series of recent cases in the courts has highlighted this. Businesses can use HMRC’s Check of Employment Status for Tax online tool (CEST) to make a determination and HMRC will stand by its output if it has been completed correctly. However, the tool itself provides an outcome in around 80% of cases with the remaining 20% undetermined. It is not clear whether the Home Office used the CEST for its historical determinations. The DWP did use the tool according to its disclosure and yet they agreed to settle the above sum with HMRC.
The HO case shows that it is essential that businesses do more than just review an engagement when it begins, they must have processes in place to review how the engagement has operated and continues to operate in practice over time to ensure it remains outside the off-payroll working rules if that was the initial conclusion.
Where can I find out more?
HMRC has issued extensive guidance and educational support on implementing the new rules in the private sector and is continuing to do so. You can find the latest information including videos and links to previously issued guidance and factsheets here.
How Abbiss Cadres can help?
We offer a unique combination of integrated expertise including regulated Legal and Tax services, People Consulting and Communications, both in the UK and internationally. We can support you with ensuring the terms of your engagements with contractors are robust and that you apply best practice to ensure you comply with the new rules from a tax perspective. Please get in touch to discuss how we can help your business.
