The Financial Times has reported that almost 1,500 contractors who provide services to GSK have received letters from HMRC querying their employment status for tax purposes.
Identical letters were sent to contractors working across departments "including IT and biomedical sciences". This is indicative of the approach we expect HMRC will apply to enquiries into the working arrangements of so called "off payroll" workers when the new rules are effective from 6 April 2020. Enquiries made under the new rules will be easier for the authorities to administer, and expose businesses to compliance failures and additional costs.
As raised in previous posts, taking action now to manage business risk and develop robust practices in advance of a HMRC enquiry is vital. The increasing appetite for HMRC to use the Corporate Criminal Offence means businesses already need to demonstrate that they have put in place reasonable steps to prevent the facilitation of tax evasion when engaging with contractors.
How is the responsibility shifting?
The original IR35 rules affected contractors who engaged with businesses through their own "personal services company" (PSC).
Such contractors are required to make a determination as to whether, if they had engaged directly with the business, they would be operating a true contract for services (i.e. a legitimate contractor relationship), or if the relationship was a contract of service (i.e. a deemed employment relationship for tax purposes).
If the relationship was effectively a "deemed employment" for tax purposes, the individual was required to operate PAYE and NIC withholding via their PSC and pay employers' NIC.
Under the new rules, the requirement to undertake that determination shifts from the individuals' PSC, to the business receiving the service (if that business meets the criteria to be classified as a Medium or Large business). For most businesses this could also mean additional PAYE obligations and increase employers' NIC costs.
The below diagram shows where the responsibility for making the employment determination sits under the current rules, and how this changes under the new rules.
What might this mean for HMRC enquiries?
The blanket enquiry letters issued to individuals providing services to GSK show the difficulty for HMRC in enquiring into the tax affairs of contractors. Not only is it resource intensive to send separate letters to each contractor, but administering nearly 1,500 enquires simultaneously will be a long drawn out process.
This is likely to be the reason enquiries of a similar scale have been limited to date. However, under the new rules, where HMRC is only required to target the "end user" it will be easier and therefore enquiries may become more widespread. We recommend businesses take action now to identify and assess their contractor population, communicate assessments to contractors, and document the process.
Whether a worker is employed or self-employed for tax purposes is not a matter of choice. Instead, you need to look at the facts of the working relationship...