Off-payroll working from April 2021: update on HMRC’s enforcement activity

The first stage of HMRC’s enforcement activity in respect of the new off-payroll working (IR35) regime began in September 2021. The new rules came into effect for large and medium size businesses in the private sector from 6 April 2021 and require businesses to determine the employment tax status of any off-payroll workers engaged through certain relevant intermediaries (typically the worker’s own personal service company). Any workers deemed ‘employed’ for tax purposes should be paid via payroll. This article considers HMRC’s current approach and how businesses should prepare for a compliance review.

What are HMRC doing?

HMRC appear to be taking a very similar approach to that they took with the public sector, when the off-payroll worker rules were updated from 6 April 2017. HMRC are issuing letters to businesses requesting a meeting to understand how the business has responded to the new rules and confirm they are compliant.

In particular, HMRC will want to understand the business’s processes for:

• Engaging contractors who work through their own intermediary, either directly or using an agency or other labour provider;
• Determining the employment tax status of these workers; and
• Deciding if any outsourced services are fully contracted out (i.e. outside the scope of IR35).

After discussing the business’s new systems and processes, HMRC will decide whether further action is needed. This could include a request for further information/samples for more detailed review. HMRC want to work collaboratively and may offer guidance on improvements to systems and processes. If mistakes are discovered then PAYE, NIC, Apprenticeship Levy, and interest will be due, with penalties being considered under the light touch approach previously announced for 2021/2022 (see our earlier article).

What should businesses do now?

HMRC’s letters formally open a compliance check so shouldn’t be ignored.

At this stage HMRC seem to be focusing on the Oil & Gas and Financial Services sectors, but we expect this will expand to other sectors in time. All businesses should therefore be prepared to respond.

In order to minimise the amount of time and effort HMRC’s checks will take, it’s important that businesses can clearly explain the actions they’ve taken to update their policies and processes to comply with the new rules, their understanding of the associated risks, and the controls they have introduced to mitigate these. Key risk areas include:

•  A number of businesses, particularly in the Financial Sector, ‘banned’ personal service companies (PSCs) to avoid undertaking status assessments under the new rules – HMRC will want to understand how these businesses ensure there are no PSCs engaged anywhere in the supply chain where they are the end client; and
• Where a business engages a supplier for a fully contracted out service (i.e. engagements where the business receives a service and not a supply of labour), it will not need to consider the new IR35 rules, but this is a particularly complex area. There is no statutory definition and little guidance on what constitutes a fully contracted out service – some suppliers claim to provide such services, where previously they supplied people/labour. HMRC will be keen to understand how businesses deal with these types of engagements.

Recent press articles relating to public sector settlements with HMRC have shown the potential for liabilities in this area to quickly build up.

Businesses should take the opportunity to review their systems and processes for dealing with off-payroll workers now. This will ensure they are able to proactively deal with any gaps/mistakes and that they are well placed to demonstrate a compliant and best practice approach to HMRC.

How KPMG can help

We have extensive experience working with organisations to manage their obligations under the new off-payroll working regime, including implementing technology solutions. If you would like to talk through how KPMG can help you ensure your business is compliant, please speak to the contacts below or your normal KPMG contact.

For further information please contact:

• Eloise Knapton
• Chris Verri