QUESTION: I have received a letter from HMRC and they want to review the status of all my workers. As I work in the construction sector, I have a substantial amount of subcontractors who work for me through their own limited companies. Should I be concerned?
ANSWER: IR35 is UK tax legislation which aims to close a loophole in the tax system whereby workers could pay less tax by setting up a limited company, than they would if employed.
As of April 6 2021, the new off-payroll working rules are in place. This means that the IR35 determination process has changed for those engaged to a medium or large client in the private sector.
Introduced in 2000, IR35 is essentially an anti-avoidance rule targeting the use of personal service companies (PSCs) to avoid employment taxes. Broadly, where an individual is engaged off-payroll and through a PSC (we shall call that individual a PSC contractor), the individual can achieve employment tax savings, whilst the engaging business is not required to pay employer national insurance contributions (currently at 13.8%).
The basic premise of IR35 is that when a business engages with an individual through an intermediary such as a PSC, the individual should be taxed as an employee, if the individual would have been deemed to be an employee for tax purposes if they had engaged directly with the business.
Under the previous regime before April 2021, the PSC was responsible for assessing the tax status of the individual and paying any employment taxes. However, in response to widespread non-compliance, the government changed the rules, shifting responsibility for assessing IR35 to the business engaging the PSC contractor.
Three years after the new IR35 regime was introduced, HMRC are increasingly focused on compliance and enforcement. There is no uniform approach to how HMRC enquiries commence - seemingly generic information gathering is often followed by targeted questions. HMRC tend to request a wide range of information, broadly focused on IR35 processes and status determinations.
Businesses with large contractor populations and complex supply chains are most exposed to risk. To manage risks effectively, businesses should seek advice before responding to any IR35 information request from HMRC.
Businesses should ensure that they have introduced robust IR35 compliance procedures, which have been devised in collaboration with the tax, HR, procurement and the senior leadership team.
Procedures should identify PSC contractors prior to onboarding and enable status determinations to be undertaken and status determinations issued in a timely manner. Procedures should be regularly reviewed to ensure that they remain fit-for-purpose and that individuals responsible for compliance receive adequate IR35 training.
- Malachy McLernon (m.mclernon@fpmaab.com) is a partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies
