In September HMRC started to contact organisations to begin to understand how end users are engaging with contractors and applying the off-payroll rules for IR35.
A template of the HMRC letter shows that they are looking to understand:
The process being adopted to hire contractors working through their own intermediaries –Personal Service Companies (PSCs) – either directly or via a labour provider such as an employment business;
The process used for determining the IR35 employment status of the working arrangements in question; and
The process for deciding if any outsourced services are indeed fully contracted out or are a supply of staffing services by another name.
Within their letter, HMRC then explain what they do once they have decided whether your systems and processes are suitable for the correct application of the rules and whether they believe more tax is owed / any interest is due on the tax owed.
It’s worth noting that HMRC launched IR35 with a ‘soft-landing,’ stating that any fines would not be applied within the first 12 months of the new legislation being implemented. However, it’s also worth noting HMRC still expects the rules to be followed and the correct tax to be accounted for. And with six months already lapsed, the 12-month window is quickly evaporating. Therefore our advice to end-users is to double check your own processes are fit for purpose and act now to make sure those processes are properly documented. Your records should provide a clear audit trail of those processes and the decisions made in relation to IR35 so that you are prepared should one of these letters land on your doormat.
Getting prepared
We have extensive experience of implementing IR35 management frameworks that allow you to make individual, case by case determinations for all contractor engagements. The silver bullet for IR35 isn’t SOW, it’s knowing IR35 and managing a framework for true and accurate determinations to be made for all contingent worker engagements where an IR35 determination is appropriate.
Ensure you have:
An approved methodology for making the IR35 determinations where appropriate. There’s a lot of criticism of the CEST tool (Check employment status for tax - GOV.UK (www.gov.uk)) and in our opinion it should be used as a guide to help build the evidence of a determination but should not be solely relied upon;
A solid and robust process to assess, review and govern all contingent workforce engagements on an individual basis;
Created a working practices policy to help the teams on the ground understand how to work with outside IR35 contractors. It’s important to remember that in IR35, actual working practices supersede contractual terms;
Developed individual services descriptions for every engagement where the working practices fall outside IR35 – and make sure you have a process to keep these under review so that they remain relevant at any subsequent extension point. Don’t forget about a change request process should the deliverables need to change mid-contract due to business demand;
Terms of engagement for both ‘outside’ and ‘inside’ arrangements – whether directly with contractors or with service or labour providers – getting the right contractor on the right contract. e.g. PAYE, umbrella, PSC;
Education and training for all hiring managers – it’s really important to keep the knowledge and education fresh for all. It’s easy to slip back into poor practices;
Evidence of all IR35 determinations made – having all the contracts, status determinations and supporting evidence stored in one place which can be audited and assessed will certainly be a benefit;
Finally – seek independent advice. We would recommend you build your own capability but getting this verified with a third party will help to ensure you keep up to date with the changing legislation, especially as case law is released and introduced.
If you are concerned with the methods and processes you use to govern and manage your contingent workforce then feel free to contact us.
Our next article will be based on making the status determination and whether we can be safe relying on a CEST determination.
