Background

A recent Public Accounts Committee Report shows how difficult it can be to comply with the IR35 rules. These were extended from the public sector to the private sector last April. It is estimated that other Government departments currently owe HMRC £263 million for 2020-21 due to not understanding the rules or not using HMRC’s Check Employment Status for Tax (‘CEST’) tool.

If Government departments with their vast resources are struggling with these rules after 5 years, it is not surprising that they are causing problems in the private sector.

The Potential Issues

HMRC’s “soft landing” for penalties for failing to comply in the Private Sector is now over. However, despite this, evidence suggests that complacency may be creeping in. Some businesses think that assessing whether roles are inside or outside of these rules was a one off rather than a rolling process.

Some of the issues we have seen recently include:

• Engaging directly rather than through limited companies, which HMRC have identified and are conducting targeted compliance activity. In this scenario, not only do businesses need to prove self-employment but also no-one has the right to dictate how they carry out the work. This is particularly tricky in heavily regulated sectors.
• Scope creep particularly with “statements of works,” this is also firmly on HMRC’s radar.
• Contracts not reflecting what is happening in practice. This can either be due to the contracts being varied by custom and practice or not being sufficiently tailored in the first place. We are also finding that the terms between the hirer and the agencies do not reflect the terms with the contractor or vice versa.
• Contractors engaged for a one-off project having contracts repeatedly extended and becoming integrated into the hirer’s business.
• Hirer’s exercising control and moving contractors onto different projects tasks without considering the consequences.
• Substitutes being rejected even though suitably qualified.

We are also seeing hirers who initially blanket banned personal service companies struggling to find the necessary resources and so are rethinking their strategies.

There has also been a huge increase in the use of umbrella companies to mitigate these risks. However, there is a wide range of umbrella providers, and their use can bring some severe compliance issues. This includes the outright fraudulent, some extremely aggressive tax avoidance, poor business management or understanding of their obligations to the best umbrellas who looked after their employees through the pandemic and continue to do so. Examples of issues include:

• Payroll Company Fraud (‘PCF’) connected with money laundering - In a typical situation, businesses will transfer their workers and the associated payroll duties to a payroll company, who in turn process the payroll and deal with any HMRC liabilities. However, in instances where PCF occurs, the payroll company will in fact be a disguised business operated by an Organised Crime Group. They will fail to organise payroll and instead keep the proceeds to themselves, thereafter, returning the workers to the original transferring business.
• Mini Umbrella Fraud connected with the exploitation of the Employment Allowances and the VAT Flat Rate Scheme – Typically there will only be one or two employees in each company with overseas directors and frequent changes of employer.
• Tax Avoidance arrangements to boost take home pay – Typically, this will involve employees receiving pay from more than one employer which will involve loans which are not repayable or receipts from overseas companies. HMRC may go after either the contractor, the agency or the end-hirer depending upon the circumstances.
• Company failures owing tax and NIC to HMRC – Known as “Phoenixism”
• Excessive margin with no added value and
• Not highlighting the potential loss of holiday pay to employees and so making much larger profits at the expense of the worker, agency, and end hirer.

While the IR35 rules place the emphasis on the end-hirer to make status determination statements, other parties in the supply chain can be liable. Many of these potential compliance failures above can result in directors becoming personally liable for criminal or civil penalties. So, it is important that you conduct the necessary due diligence on your supply chains.

This includes research into the company through a companies’ house search, finding out who the directors are and which other companies they are directors for, and what the payroll offering is. Caution should be taken when the deal appears too good to be true, or excellent value compared to the competition.

How can we help?

We can offer a seamless solution to ensure that you are meeting all your obligations. This can include contract reviews, reviews of your processes for both employment law and employment tax risks and help with due diligence on supply chains.

If you need further advice on the employment law implications or a contract review, contact Paul Chamberlain at Paul.Chamberlain@jmw.co.uk or Simon Bloch at simon.bloch@jmw.co.uk

If you need further advice on mitigating the employment tax risks to you as a director personally or the risks to your business, please contact Sue Ollerenshaw at efficientemploymenttaxsolutions@live.co.uk

If you think you may be indirectly linked to illegal activity, fined under anti-money laundering legislation, or have failed to detect fraud and report it, please contact Evan Wright at evan.wright@jmw.co.uk

This blog has been co-authored by Paul Chamberlain and Sue Ollerenshaw from Efficient Employment Tax Solutions.