The soft landing is over – are you IR35 ready?

When HMRC introduced changes to the “off– payroll working rules” — known as IR35 — it promised the private sector a year–long “soft landing” until April 2022. What does the end of this grace period mean for the oil and gas sector?

Here, I tackle some common questions.

First, what does the end of the soft landing mean?

April 2022 marked HMRC’s transition from education to enforcement.

Investigations will begin with letters sent out to businesses that use contractors asking for evidence of compliance, followed by a full investigation in the event of any discrepancies. Should HMRC discover any mistakes, unpaid tax would be claimed back and fines issued for non– compliance.

Contractors are a crucial part of the oil and gas workforce, so we strongly advise companies review the IR35 solution that they put in place in April 2021 to ensure it is compliant, remains appropriate and that they are prepared to evidence this.

When will HMRC begin enforcement activity?

Looking to the public sector, where the same rules were introduced in 2017, we can see that HMRC did not proceed with investigations immediately.

In 2021, a number of government departments reported they had repaid significant amounts of tax due to mistakes made with IR35. These liabilities had built up to eye–watering sums. Left to accrue in this way, significant tax bills could also be issued retrospectively to businesses in the private sector on the conclusion of investigations.

HMRC appears to have been scaling up its investigations team in recent months, with initial letters sent to the oil and gas industry prior to April and follow–up letters reported to have been received more recently, so businesses should be ready to demonstrate their compliance.

How do you demonstrate “reasonable care”?

In HMRC’s guidelines, reasonable care means that “clients should act in a way that would be expected of a prudent and reasonable person in the client’s position”.

The definition remains open to interpretation. However, HMRC’s guidelines detail a long list of reasonable and unreasonable behaviours. Recently issued letters sent to oil and gas businesses have asked questions such as: what is you hiring process for contractors?; what is your process for deciding their employment status?; what is your process for deciding if any services you outsource are fully contracted out?

It is recommended businesses have a “reasonable care evidence pack” readily available. This should include evidence of regular reviews of status determination statements, appropriate policies and processes, as well as records of ongoing training and support for employees responsible.

If you’ve decided to process all contracts as inside IR35, does this mean you are compliant?

Processing contracts as all inside IR35, and therefore on payroll, may seem like a foolproof approach. However, if a contractor who should be classified as outside IR35 is automatically placed inside it, this can be deemed not to be “reasonable care”.

Based on HMRC’s own estimates, only a third of contractors should be determined inside IR35, while a recent House of Lords report recommended that false inside IR35 determinations should be enforced with equal rigour as those outside.

A similar route is to outsource contractors through umbrella companies, who process their “employees” under PAYE. While this is valid, to avoid the risk of hidden liabilities it requires businesses to have clear visibility of how IR35 is being managed in the supply chain.

Both approaches limit a hirer’s talent pool to those contractors who are willing to have tax deducted under PAYE. With increasing competition for talent, this is a good time to re– evaluate your approach and put a compliant process in place to hire outside of IR35.

What are the benefits of offering outside IR35 roles?

According to KPMG and REC’s UK Report on Jobs, candidate shortages are beginning to restrict the growth of both permanent and temporary job roles. For the energy sector, not being able to resource projects can lead to costly delays and even loss of business.

In this competitive hiring environment, being able to offer compliant outside IR35 roles increases interest from the most talented contractors — supporting business growth and enabling projects to be completed on time and to budget. What are the next steps? Once you have your process in place, it is wise to stress test it through a mock investigation or audit, when an independent third party reviews evidence and evaluates it against HMRC’s reasonable care threshold.

This will highlight any potential risks that can be mitigated ahead of an official request from HMRC, providing valuable insight into whether a solution remains compliant and what improvements can be made to ensure ongoing best practice.

BE PREPARED: Matt Fryer advices businesses to check their contractor policies now to avoid future tax fines.