What HS2’s IR35 failings can teach other off-payroll hirers

The recent news that High Speed 2 Limited (HS2) has agreed to pay £6.2million to HMRC for failing to comply with the OPW rules is the latest example of a public body falling foul of this legislation, commonly known as the IR35 rules, writes John Chaplin, employment tax partner at accountancy and business advisory BDO.

IR35 Off-Payroll Working rules recap

The public sector Off-Payroll Working rules were introduced on April 6th 2017 and, with the exception of small companies, they were extended to private sector organisations on April 6th 2021.  

It’s reasonable to assume that HMRC success in obtaining large settlements from the public sector will soon be replaced by a similar story in the private sector.

So, what can the private sector learn in advance of HMRC’s visit?  

How do the ‘new’ IR35 rules operate and what’s the aim?

The rules are designed to stop disguised employment where a worker supplies their services via a limited company (a personal service company) rather than as a direct-hire employee. 

The organisation receiving the workers’ services (the end-client), must assess the employment status of any worker supplied via a PSC and issue a Status Determination Stat (SDS), irrespective of whether they have hired the PSC direct or via an intermediary such as a recruitment agency.  

Any errors in applying the rules will result in HMRC seeking settlement of any underpaid tax/NIC, plus late paid interest and potential penalties. 

IR35: What were the OPW errors made by public bodies?

Unlike other public bodies such as Defra, Ministry of Justice and NHS Digital, which each made incorrect IR35 status decisions, HS2 had not actually undertaken IR35 assessments for workers supplied to them via other third parties.

There can only really be two reasons why HS2, the public body set up to deliver the HS2 rail project, did not complete IR35 reviews.

Either:

1. HS2 chose to ignore the rules, or

2. Someone determined that HS2 was not the end-client, i.e. they were not engaging for the personal services of the worker but instead were buying ‘contracted out’ services, sometimes referred to as ‘outsourced’ services or ‘statement of works.’ Therefore, any OPW compliance obligations fell to the third parties supplying the workers. 

HS2, what went wrong?

Discounting reason 1 as simply too reckless, the question then falls as to how HS2 came to the outcome noted under reason 2.

Was it perhaps incomplete or poor advice?

Was it a misunderstanding of the OPW rules where third parties are in the supply chain?

Or perhaps it was the result of indirect pressure through the supply chain that the workers would only supply their services if outside IR35 and via the third parties? 

Whatever the reason, HS2 is now paying the financial price.

How do HS2’s IR35 mistakes inform the private sector? 

HMRC has warned it will seek to penalise any end-client who is unable to demonstrate and evidence that they have taken “reasonable care” in applying the IR35 off-payroll rules to their worker supply chain.  

Updated HMRC guidance supports this view.

Our experiences of supporting public and private sector organisations in managing their obligations of the OPW rules highlight a fundamental need to understand the legislation.

Top four OPW compliance hacks, in wake of HS2’s IR35 failings

And the OPW legislation’s intent, so that:

1. All affected workers are identified and a decision made about their IR35 status before a payment is made for their services –
2. There is an understanding that any misunderstanding of the rules will lead to mistakes being made, with associated financial and workflow impacts.
3. An OPW engagement process is created and maintained. The process should clearly delineate tasks and identify who is accountable for facilitating and recording each relevant step, while ensuring each stakeholder has the skills and training to fulfil their role, so they can accurately monitor the OPW resource deployment.
4. There is a positive approach to governance, with independent review points for each key stakeholder process, and a continuous improvement mindset, aligned to real time monitoring of the use of OPW workers. This isn’t a case of last but least – this fourth way to comply with the OPW rules, like the three above, should be a non-negotiable for any organisation seeking to manage and document how they meet their obligations under OPW.

The three Ds

In a nutshell, have a clear process in place to identify all relevant workers, assess their status and check compliance regularly.

A little maxim of mine that might help to remember:

“Determine, Decide, and Defend”.

Next steps on IR35, and OPW enforcement from HMRC?

We have seen increased HMRC activity in the private sector focusing on OPW resources, with specific questions being asked of organisations on how they have considered and applied the new OPW rules to their business.

These HMRC questions include what procedures are in place to identify off-payroll workers, what is the source of those workers, and what changes in procedures has the organisation adopted to manage the new rules.

When an inspector calls, they also like to know whether HMRC guidance and support tools have been accessed.

In addition when HMRC visits, questions are being asked around identifying all outsourced services, and being able to robustly demonstrate that a particular outsourced service has been correctly concluded as outside the scope of the rules.

Top takeaways from HS2’s IR35 failings

In short, it’s clear that HMRC has learnt from its enforcement work in the public sector, before HS2 and as a direct result of its £6.2m take-home from the non-departmental public body.

After three-and-a-half years of the OPW rules being in place for the private sector, it is surely only a matter of time before a commercial organisation agreeing large settlements with HMRC for IR35 failings emerges -- like those we have seen in the public sector. Don’t leave it until it is too late to check that you won’t be one of them.