How to deal with an HMRC Off-payroll compliance check

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Following the introduction of Off-payroll working into the private sector in April 2021, HMRC is now starting to visit firms by opening formal compliance checks. These begin with a letter being sent from HMRC’s specialist off-payroll working team titled “Applying the off-payroll working rules – effective from 6 April 2021.”

These letters also explain that if HMRC decides your systems and processes are suitable, it’s likely they will close the check and take no further action because the risk of your firm not correctly applying the rules is low.

Given that every single piece of correspondence from this point on could at some point find its way into a tax tribunal hearing, we recommend that advisors with specialist knowledge of IR35 and status matters be used to help with this process from day 1.

How an Off-payroll compliance check works

HMRC will first seek to understand the systems and processes your organisation uses to apply the rules. These include:

  • the hiring process for contractors who work through their own intermediary,
  • process for deciding the employment status of the workers
  • process for deciding if any services you outsource are fully contracted out

The initial step can be dealt with over the phone or you can ask for all correspondence to be conducted in writing – in which case, the inspector will write to ask for the information needed to complete the check.

HMRC indicates that it will make use of the guidance on www.gov.uk titled “supporting organisations to comply with changes to the off-payroll working rules (IR35)”.

What will happen after the IR35 compliance check?

From the letter, HMRC is beginning by taking a risk-based approach to its enforcement. Their guidance also reinforces this stance: “Robust risk assessment activity allows us to identify and target the areas where customers are most likely to apply the off-payroll working rules incorrectly.”

The reality is that if firms have done things correctly, there is a very low risk of a much wider investigation yielding any additional tax.

From two decades of experience with IR35, it is going to be harder for HMRC to defend an appeal for an Off-payroll working (Chapter 10 of ITEPA) case at the First-tier tribunal than a traditional IR35 one based on the Intermediaries Legislation (Chapter 8 of ITEPA). Whilst firms should not be complacent, in our view, the success of this legislation, like the original IR35, very much depends on producing a behavioural effect to make firms comply.

We certainly don’t believe HMRC will bludgeon firms through litigation if they have tried to do the right thing. Their guidance states that they will “…support customers who are trying to do the right thing and comply with the rules” but will “..challenge deliberately non-compliant customers.”

What can we learn from the IR35 tax tribunals?

If these compliance checks are not shut down early, then things can get protracted. It can be two years of considerable correspondence and heated discussions with HMRC before either the case is closed down, or a notice of determination is given – i.e. a tax bill. If an appeal is made, it can be a further two years and considerable legal costs before a tribunal makes a decision.

Firms do not want a four year battle with HMRC, even if they are right. We know this at IR35 Shield, which is why our ethos is around getting determinations right and shored up with evidence using our unique Monitoring technology.

There are, however, some key lessons from tribunals, to take into account from day 1 of a compliance check. Crucial to winning any appeal is the footprints placed along the way. So, make sure you take proper advice from advisors that know how to handle these specialist compliance checks in case things move forward towards a tribunal. HMRC are using specialists. So should you.

The primary question one must ask from the beginning is this: "If this case moves to the tribunal, what would I want to see in the bundle? [evidence used in the court]"

Focusing on that question is how defence experts work, from the start. If you only engage professionals at the point of determination, when the “wolf is at the door”, you have not had the chance to lay the footprints and the outcome may be less favourable.

How can we help?

Our defence duo of Chris Leslie and Dave Chaplin have IR35 enquiry and tribunal experience – they won the most recent IR35 case, RALC Consulting in October 2019 and are actively engaged in defending status cases.

IR35 Shield are being asked by firms to come in and see if we can find holes in their processes before HMRC do. You can read more about our “IR35 Stress Test" services on our website. If you need any help preparing for or dealing with an investigation, please get in touch - we'll be happy to help.

IR35 Shield

IR35 Shield is the cloud-driven industry leading IR35 compliance standard for business and individual contractors.