HMRC asking new IR35 questions of clients whose contractors disputed their status

The taxman is quietly making changes to how he assesses end-client processes for handling contractor disputes over IR35 status, Treasury minutes reveal.

The changes involve HMRC asking the client “specific questions” about their dispute-process and obtaining feedback on the volume of disputes; their outcomes, and if SDSs were altered.

Published by HMT on December 5, the minutes fail to outline the questions being posed, but IR35 review firm Qdos has revealed that they are numerous and multi-faceted.

'Demands and questions from HMRC'

“A list of all contractors – along with their names, job title and date they were engaged… [is chief among] the demands and questions being put [by HMRC],” advises the firm.

“Whether engaged inside/outside IR35; detailed information on how the IR35 determination was made, [and] if ‘contracted-out’ service providers have been used [are also sought].”

In the minutes, HMT says that if the answers to HMRC’s questions “suggest that customers require further….support”, then “more targeted education” could potentially be delivered.

'This is HMRC weighing up whether to launch IR35 investigation'

Qdos decoded: “At this initial stage, HMRC is on a fact-finding mission, gathering details. That’s before they move to weighing up whether to launch an IR35 investigation.” 

It therefore goes without saying, adds the firm’s Seb Maley, that any correspondence with HMRC “should be handled carefully and ideally, by an expert.”

The Revenue’s probing questions are likely to quickly unearth the “difference between blanket determinations and commercial decisions not to use PSCs,” says Bauer & Cottrell.

“The former would be in breach of the off-payroll rules,” says the status advisory’s co-founder Kate Cottrell, a former tax official. “But not the latter.”

'Fast, independent, process for contractor IR35 disputes'

The Revenue’s new process probing into the end-user dispute process only came to light in HMT’s minutes because of a recommendation by the Public Accounts Committee.

Unconvinced PSCs who receive the wrong IR35 determination have much recourse, the PAC urged HMRC in May to ensure the dispute process is “fast,” and “independent” -- even though the end-user conducts it.

The government’s reply (which goes onto mention the new questions and the probes into volume, outcomes, and any altered Status Determination Statements, starts off:

“HMRC already assesses clients’ processes for handling disputes by contractors over
their status determination, as part of routine compliance checks. However, HMRC has reviewed and updated how we do this.”

'Buying a burgular alarm after the event'

Coincidentally -- or perhaps not coincidentally at all, the HMRC changes come as end-users are being encouraged to relook at their off-payroll policy and procedures.

“Now the dust has settled following the recent IR35 turbulence, it's the perfect time to re-evaluate your approach to managing ongoing IR35 compliance,” posted CoComply director Chris Jones.

He added: “When budgeting for 2023, it’s important to consider incorporating IR35 into your plans to ensure there is sufficient budget to have compliance managed properly

“You don’t want to be the organisation buying a burglar alarm after the event, if that makes sense!”

'Recruiters still don't seem IR35-interested'

But Andrew Webster, managing director of Workwell says it’s fee-payers who need a wake-up call, and now.

“Off-payroll [rules’ reinstatement] has happened,” he wrote online. “Yet a considerable number of UK recruiters still don't seem interested in understanding which IR35 compliance methodology or provision their end-clients have adopted to determine status.

“That’s even though [in the private sector], we’re now 19 months into an IR35 business-as-usual world!”

'HMRC has ramped up its IR35 compliance activity'

And there lies the silver lining according to Mr Maley, Qdos’s chief executive, who says HMRC has been asking its new “specific questions” of organisations in the construction, technology and financial services industries

“The off-payroll working rules are set to stay – granted, it’s not the news that anyone wanted, but businesses know what they must do to compliantly manage IR35 and ensure contractors are assessed fairly.” 

In a statement last night, Mr Maley continued to ContractorUK: “HMRC has ramped up its IR35 compliance activity among businesses this year, carrying out compliance checks across the board.

“With the future of the off-payroll working rules now decided, I can only see this increasing in 2023. The government is desperate to raise tax revenue and sees IR35 as a key area in which to do so.”

'First possible examples of 2021 off-payroll rule-breaches'

Chris Mattingly, compliance lead at WTT Legal issued the same ominous forecast.

“Perhaps it will come as no great surprise, but I think we will see a greater number of IR35 and off-payroll enquiries in 2023,” Mr Mattingly told ContractorUK.

“While unlikely we might even see our first examples of non-compliance in the private sector since the off-payroll reforms were introduced on April 6th 2021. HMRC will surely be looking to identify a ‘high profile’ target as early as possible, such that it will act as a deterrent to others.”