April 2022 will mark the end of the soft landing to the 'off-payroll working rules', otherwise known as the IR35 legislation. Following the change to the rules on 6 April 2021, HMRC explained that businesses would not have to pay penalties for inaccuracies in the first 12 months, regardless of when inaccuracies are identified, unless there is evidence of deliberate non-compliance1. As HMRC's transition from education to enforcement approaches, the question arises as to whether businesses ready for greater scrutiny.
IR35 reform began in 1999, with the latest regulation change coming into force in April 20212 as part of the Government's clampdown on what is perceived as disguised employment. These latest reforms place the burden of determining the tax status of contractors on all public sector authorities employers and medium or large-sized businesses (also known as with the end hirer or end client), instead of the underlying contractor. Those found to be within the scope of IR35 will face significant tax implications as they must pay income tax, and employers and employees must pay National Insurance Contributions ("NIC"s).
HMRC have stated that they will support businesses who are trying to do the right thing and meet their responsibilities. As part of this they have developed their Check Employment Status for Tax tool ("CEST") as a sensible starting point for any status determination process. Key elements to focus on as part of the IR35 status determination include, but are not limited to: control; the right of substitution; whether there is an obligation on the parties to offer and accept work (mutuality of obligation); and documenting these in the Status Determination Statement ("SDS"). Reasonable care should be taken when assessing an individual for an SDS and accompanying CEST test when making a determination, as well as keeping the review updated periodically.
The new rules in action
As such, we have seen how the "IR35 tests" have been applied by the Tribunal in recent months, both in the Professional Game Match Officials Ltd decision and most recently the decision in Basic Broadcasting Limited.
The latter (involving BBC/ITV presenter Adrian Chiles), exemplifies the complexity of IR35. Contrary to HMRC's assessments, there was no underpayment of tax or NIC, as Mr Chiles was considered to be outside the scope of IR35. The judgment considered all the circumstances and activities as a whole and placed emphasis on the fact that Mr Chiles was in business on his own account (a significant factor displaced the case that Mr Chiles was an employee). Importantly, the Tribunal took into account the number of clients he had, his ability to take on other roles that "did not bear fruit" and his reputation as a broadcaster. This decision is particularly significant, considering the treatment of television presenters in recent appeals.
As highlighted in HMRC's written evidence3 (dated 18 November 2021) to the Lords Economic Affairs Committee Finance Bill Sub-Committee's 2020 inquiry on the new IR35 rules, the administrative burden for businesses from implementing the recent changes will be higher than forecasted. The change of rules impact was assessed at £14.4 million, but this has since been revised to a one off impact of £19.7 million. HMRC in the same evidence simultaneously, and to somewhat contrast the forecasted numbers, put forward that the majority of organisations found the ongoing operation of the rules “easy and reasonable to apply”. The Lords’ Economic Affairs Finance Bill Sub-Committee response4 to this evidence recognised the limitation of the assistance provided through the CEST tool and the challenges and burden of costs which businesses and workers face because of the new rules.
Now is the time for businesses to engage with their IR35 review process, with only a short period until the soft-landing period comes to an end. On 27 February 2020, HMRC estimated the reforms could recoup £1.3 billion a year by 2023-2024.5 This suggests IR35 compliance will be an area of growing interest for HMRC from April 2022, when financial penalties may be issued.
The administrative burden of compliance on business should not be underestimated. The earlier arrangements are reviewed, and conversations start, the better to both minimise costs and reduce the risk of HMRC scrutiny.