HMRC has published its long-awaited enforcement policy that applies to the roll-out of off-payroll working in the private sector. What are the critical elements of it that you need to be aware of?

IR35
Many people still refer to these changes as IR35. However, strictly speaking, IR35 will still exist in its current format for some contractors and consultants working through an intermediary, such as their service company or in a partnership with a 60% or more material interest. It will still need to be considered for those who take on engagements with small private sector clients rather than public sector or medium/large private sector engagers. For those small private sector engagements, the contractor will remain responsible for assessing if the IR35 rules apply to them and paying the appropriate tax and NI.

Off-payroll
This refers to the reforms that will apply to all engagers, other than those in the private sector that are classed as small, from 6th April 2021 and will require the engager to assess the status of all engagements with workers provided through an intermediary to determine if they would be working under the same terms and conditions as an employee if it were not for the intermediary. If the assessment is that the worker is a deemed employee caught by the off-payroll rules, they must be added to the payroll of whoever is due to pay the worker’s invoice, either the direct engager or another fee payer such as an agency, and tax and NI will be withheld from their invoiced fees.

Pro advice. The off-payroll reforms do not apply to self-employed, i.e. sole traders, as there is no intermediary between them and the engager. It has always been the engager’s responsibility to decide if somebody can be treated as self-employed or subject to PAYE.

First-year enforcement
HMRC has now published a briefing outlining its enforcement approach for the first twelve months of the reforms. It first confirmed in February 2020 that it would not apply penalties for inaccuracies in the first twelve months relating to the off-payroll rules unless there is evidence of deliberate non-compliance. This approach has not changed. HMRC has made a commitment that engagers can expect:

• to be supported in trying to do the right thing to comply with the rules
• to be helped by HMRC to meet their responsibilities
• HMRC to check that any corrections to mistakes in the assessment are actioned
• non-compliance to be identified and challenged by HMRC, particularly if it is deliberate through tax avoidance schemes
• that a specialist HMRC team will work on compliance activity.

Guidance and stakeholder engagement
HMRC has taken the opportunity of the twelve-month delay in the roll-out of the reforms to the private sector to enhance the guidance and support available to employers and has worked with stakeholder representative bodies to understand further the labour market for consultants and the practical aspects of the reforms.

HMRC contact. Engagers should not be concerned if HMRC makes contact with them to discuss their preparation for the reforms. This does not imply that it thinks there are any compliance issues, but simply that the organisation is in a sector with high usage of personal service companies (single director limited companies who are likely to be the most common form of intermediary). During such calls, HMRC is likely to discuss handling status assessment and how the payroll has been set up to withhold tax and NI from the workers’ invoices. If HMRC is concerned that you are not applying the rules correctly, it may suggest that you attend a webinar, a workshop, or a one-to-one advice call.

Pro advice. During such interaction, HMRC will not carry out status determination statements (SDSs) for you or assure you that the assessments you have already undertaken are correct. You can use the Check Employment Status for Tax tool for your status assessments. If this has been used honestly and accurately, HMRC will stand by the results.

What are your responsibilities?
Your responsibilities will vary depending upon whether you are an engager, an agency, or a deemed employer.

Engagers:

• taking reasonable care in coming to your SDSs reflecting the working practices of the contractor, and re-assessing them if circumstances should change
• providing a copy of the SDS to both the worker and any agency in the supply chain
• setting up a dispute resolution process to deal with appeals from agencies and workers about the status assessment within 45 days
• withhold tax and NI from the worker’s invoice if the engager is the fee payer, so they become the deemed employer.

Agencies:

• pass on any SDS received from an engager to the next agency in the supply chain if the agency is not the fee payer.

Agencies who are deemed, employers:

• act on any SDS received indicating the engagement is caught by the off-payroll rules and withhold tax and NI from the worker’s invoice if the agency is the fee payer as they become the deemed employer.

What if you make a mistake?
If you realise you’ve made a mistake, you should make an unprompted disclosure to HMRC. Errors could include paying the worker’s invoice on a gross basis because you’ve not carried out an SDS or not withholding enough tax and NI. Where additional tax is payable due to a mistake, penalties may be due, but making an unprompted disclosure can allow HMRC to reduce or cancel such penalties.

No penalty. HMRC will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including in the SDS. Where HMRC has indicated how to correct a mistake, and this requires, for example, reporting corrective information through real-time information (RTI), it will follow up and check that the RTI data has been submitted and the liability is paid over. Where mistakes continue to be made or are not corrected, HMRC will consider the engager’s behaviour to determine whether subsequent penalties are due and the next steps that it will take. HMRC will publish their details for those who deliberately choose not to comply with the rules as they will be classed as “deliberate defaulters.” Deliberate non-compliance involved in criminal activity can lead to prosecution.

What about commercial choices?
Some engagers may choose only to offer fixed-term contracts to consultants in the future or only engage workers through umbrella companies (where the agency deducts PAYE). These are perfectly compliant commercial approaches that can reduce risk and will not be challenged by HMRC as long as the appropriate RTI reporting and payment of liabilities are taking place. It is artificial or contrived arrangements that HMRC will challenge if they appear to be designed to circumvent the rules. If you as an engager have been offered solutions to the off-payroll working rules that sound too good to be true and that purport to find a loophole, be aware that so far, none of these are successful. HMRC deems all to be tax avoidance schemes.

HMRC will not apply penalties for inaccuracies in the first twelve months relating to the off-payroll rules unless there is evidence of deliberate non-compliance. But if something sounds too good to be true that you’re being offered as an engager of consultants or contractors, it probably is, and it could land you in trouble, including criminal prosecution.

If you’d like to discuss anything raised in the above blog post, or want some further information call Unique Payroll on 01473 461 028 or visit https://uniquepayroll.co.uk/.