HMRC has published a policy paper on how  it will support affected organisations to comply with changes to the off-payroll working rules (IR35) from 6 April 2021 and how it will intervene if customers deliberately do not comply.

The paper is reproduced in full below.

 

Introduction

The off-payroll working rules have been in place since 2000. They are designed to make sure that an individual who works like an employee, but through their own limited company (usually a personal service company ‘PSC’) or other intermediary, pays broadly the same Income Tax and National Insurance contributions (NICs) as other employees. The rules do not apply to self-employed individuals.

The changes to the off-payroll working rules mean that the responsibility for determining whether the rules apply will shift from the contractor’s PSC, to the client organisation engaging them.

Where a contractor provides their services through a PSC, from 6 April 2021 it is the responsibility of all medium and large-sized private and voluntary sector organisations, and all public sector organisations, to assess the contractor’s employment status for tax purposes.

If the rules apply, the client organisation, or the agency or third party paying the contractor’s PSC, is then responsible for accounting for employment taxes and NICs.

Small non-public sector organisations are not affected by the changes, and the contractor’s company or other intermediary remains responsible for determining if the off-payroll working rules apply and paying the relevant tax. Workers and agencies may ask small non-public sector organisations they contract with, to confirm that their organisation qualifies as ‘small’.

This briefing follows the publication of detailed guidance in our Employment Status Manual and our comprehensive programme of education and support activity to support individuals and organisations affected by the changes to the rules, including:

• one-to-one educational discussions with the largest organisations and agencies
• webinars providing support to all affected organisations
• working with specific sectors to identify any areas of difficulty

In February 2020 HMRC published a statement about our supportive compliance approach to the changes to the off-payroll working rules. This explained that we will take a ‘light touch’ approach to penalties.

Customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance. This commitment has not changed.

We have also committed that we will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.

Our compliance principles

For organisations affected by changes to the off-payroll working rules (client organisations, agencies and deemed employers) from 6 April 2021 these principles will underpin the way we support you to comply, and how we will intervene where we suspect non-compliance:

• we will support customers who are trying to do the right thing and comply with the rules
• we will help customers meet their responsibilities under the off-payroll working rules
• where customers make a mistake, we will help them correct it
• we will check that mistakes are corrected
• we will identify and correct non-compliance with the off-payroll working rules
• we will challenge deliberately non-compliant customers
• we will challenge tax avoidance schemes that claim to avoid the off-payroll working rules or otherwise reduce the tax payable
• we will use a specialist team to carry out all our off-payroll working compliance activity

We will support customers who are trying to do the right thing and comply with the rules

It is your responsibility to determine if you need to apply the off-payroll working rules, and our detailed information will help you understand if you are affected. We’ll promote the support available to those affected and who may need it to apply the rules correctly.

It’s important that we understand how organisations, and the wider labour market, respond to the changes. We will continue to invest in strong relationships with trade and representative bodies that represent customers affected by the rules, and help them to provide support to customers who need it.

We may contact you to discuss how you are applying the changes to the off-payroll working rules. This won’t necessarily mean we believe you are not complying with the rules. It may be because we are aware the sector in which your organisation operates is impacted by the changes to the rules. For example, a sector with a high usage of PSCs.

During these interactions, we may ask for information to confirm that you are applying the rules correctly. For example, if you are a client organisation, to check that you are taking reasonable care in making status determinations or if you are a deemed employer, to check whether you are deducting and paying the correct liabilities.

If we think you need further support to enable you to meet your responsibilities, we’ll offer it. For example, we may invite you to attend a webinar, workshop or one-to-one advice call.

We’ll provide support based on our view of the employment status indicators and give advice on best practice to help you fulfil your obligations. However, we will not make employment status determinations for you or assure the status of specific engagements or processes you have in place.

The online Check Employment Status for Tax (CEST) tool helps you determine a worker’s employment status for tax and NICs purposes. HMRC will stand by the result produced by the tool, provided the information inputted is accurate and the tool is used in accordance with our published guidance.

We will help customers meet their responsibilities under the off-payroll working rules

Our job is to encourage everyone to correctly apply the rules and meet their responsibilities in full.

Your exact responsibilities depend on whether your organisation operates as a client organisation, an agency or a deemed employer. These responsibilities may include:

• making accurate employment status determinations (referred to as ‘Status Determination Statements’ or ‘SDS’ in legislation) that reflect the actual working practices of the contractor, and taking reasonable care in coming to those decisions
• developing and maintaining client-led status disagreement processes which are required to allow client organisations to deal with concerns raised by workers and deemed employers on the SDS received, including dealing with representations appropriately within time limits
• passing information to relevant parties in the labour supply chain, including having processes in place so that information is passed on at the right time before payment is made
• operating PAYE correctly, including the calculations of chain payments and deemed direct payments so the correct tax and NICs are deducted

Where customers make a mistake, we will help them correct it

We know mistakes can happen. A mistake for the purposes of the off-payroll working rules may mean that you have not met some or all of your responsibilities, or have paid more or less tax and NICs than is due.

Mistakes can include payments being made to contractors without the correct deductions being made or making inaccurate employment status determinations.

If you realise you have made a mistake in applying the off-payroll working rules, you should tell us about it at the earliest opportunity. We can work with you to put it right, whether that means paying unpaid tax or refunding overpaid tax.

Where additional tax is payable as a result of a mistake, penalties may be due. However, if you tell us early and work with us to correct the mistake it can help mitigate any penalties.

We will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations.

If we see that you have made a mistake, we will support you to understand how to apply the off-payroll working rules correctly. We will encourage you to self-correct errors before we consider if we need to intervene further, unless there is reason to suggest you are being deliberately non-compliant.

We will check that mistakes are corrected

We may follow up with you after our initial contact or check available data (such as the PAYE Real Time Information ‘RTI’ system) to confirm you have self-corrected. We may also check that your systems and processes are compliant with the rules.

For example, if you agree to correct a mistake by changing a contractor’s status determination, we may check that tax and NICs have been accounted for. Or if you agree to update the client-led status disagreement processes, we may contact you to check that that the new process meets the requirements of the legislation.

We will follow up to confirm you become compliant and pay the taxes that are due if we identify you:

• didn’t take the opportunity to correct mistakes
• are continuing to make mistakes
• are making new mistakes

We may ask for more information and data to understand why you are making mistakes and offer you another opportunity to self-correct or we may review all information and data related to your off-payroll workers to gain assurance that you are meeting your responsibilities in full.

We will consider your behaviour to determine whether penalties are due and determine the appropriate next steps in our approach.

We will identify and correct non-compliance with the off-payroll working rules

Robust risk assessment activity allows us to identify and target the areas where customers are most likely to apply the off-payroll working rules incorrectly.

We will adjust our compliance activities if new information indicates an emerging area of concern. Our activities include, but are not limited to:

• actively monitoring and assessing data we receive, including RTI data
• identifying business sectors with a known high usage of PSCs
• monitoring population trends and usage of PSCs
• acting quickly where non-compliance is reported to HMRC, including reports from other parties in the labour supply chain or contractors

Identifying non-compliance allows us to offer targeted support to those who need it, as well as stepping in where we find deliberately non-compliant organisations.

We will challenge deliberately non-compliant customers

Although most customers try to pay the right tax, some deliberately get their tax affairs wrong. We’ll always follow up on non-compliance if there’s a sign of deliberate behaviour.

This is an important part of our approach and helps to drive trust of honest taxpayers, who want to know we will create a level playing field by ensuring the deliberately non-compliant don’t get an unfair advantage.

We call people who deliberately get their tax affairs wrong ‘deliberate defaulters’. In certain circumstances, we can publish details of deliberate defaulters to encourage them to put their tax affairs in order.

We realise that publication is a very serious matter and we want to make sure we only publish details when it is right to do so. Further details about how we decide whether to publish details of deliberate defaulters are available on GOV.UK.

Any deliberate non-compliance involving criminal activity can lead to prosecution.

We will challenge tax avoidance schemes that claim to avoid the off-payroll working rules or otherwise to reduce the tax payable

We know that as a result of the changes to the off-payroll working rules, some organisations may consider whether engaging PSCs, or other intermediaries, is the best way for them to continue to engage contractors.

Some may offer contractors permanent roles instead, some may require contractors to work through agencies or umbrella companies and others may fully contract out the services their contractors are providing to another organisation. Many of these will be commercial choices and will be fully compliant with tax law.

However, we will take action if contractors are engaged through artificial, contrived arrangements which are claimed to avoid the application of the off-payroll working rules or result in customers paying less tax than should be the case.

This could include umbrella companies offering take home rates of pay that are too good to be true through artificial schemes that claim to disguise earnings as non-taxable payments, such as loans.

We never approve tax avoidance schemes. If you are worried about becoming involved in a tax avoidance scheme, or think you are already involved in one and want to get out of it, you can:

• find out how to spot the signs of tax avoidance schemes
• report details of tax avoidance schemes
• find further support and information as part of HMRC’s Tax avoidance – don’t get caught out campaign

We will use a specialist team to carry out all our off-payroll working compliance activity

Our priority is to support you to be compliant, as well as intervening where we find non-compliance. If you have a Customer Compliance Manager (CCM), we’ll continue to use that relationship to manage and assure compliance with the off-payroll working rules.

Case studies

The following case studies are for illustration purposes only. Compliance activity will always be determined on a case-by-case basis.

Self-serving to comply

Company A is a medium sized business. Company A reviews its workforce and identifies that it engages contractors who work through their own limited companies. Company A will need to take action to comply with the off-payroll working rules.

Company A checks the information on GOV.UK, reviews education and support material and attends an HMRC webinar to help them understand their responsibilities under the off-payroll working rules.

Directors of Company A ensure that all key personnel understand their responsibilities. Company A updates its systems and puts processes in place, including the use of CEST, to help it come to status determinations. Company A require no further support to comply with the off-payroll working rules.

Supporting a customer to self-correct a mistake

Company B is a medium-sized business that engages contractors via Agency Z. HMRC contacts Company B to make sure it is correctly determining the status of the contractors it engages.

HMRC asks Company B to provide a sample of Status Determination Statements (SDS) made for current contractor engagements. HMRC identifies that Company B has misunderstood how the employment status indicator of the right of control applied to their organisation and therefore has made a mistake in determining the status of a group of contractors.

Company B provides information to substantiate that reasonable care had been taken in making these determinations. Company B agrees to take corrective action to make sure the right tax is paid.

HMRC shares links to relevant guidance and support with Company B to help it understand how to make accurate status determinations. Company B reviews the information and re-assesses its status determinations. Company B promptly informs its contractors and the agency.

Company B requests confirmation that Agency Z has updated its RTI records for any amended engagements and confirms this with HMRC. Through the information shared, HMRC checks PAYE records to confirm this is the case.

Disclosure from a customer who has not taken reasonable care

Company C is a large-sized business that engages contractors via Agency Y.

During an internal audit, Company C identifies that it has only considered the contractual conditions and not the actual working practices of contractors. Knowing this may mean incorrect status determinations have been made, Company C discloses this information to HMRC immediately.

HMRC support Company C in understanding how to correct the error and develop better processes to ensure the error does not happen again. Company C confirms it understands its responsibilities and decides to implement new processes to make new SDSs for all contractors in scope of the off-payroll working rules.

Company C then informs the contractors and Agency Y of its updated determinations in the form of a revised SDS.

Company C agrees that it has not taken reasonable care and is therefore liable to pay any tax and NIC that is due. HMRC assesses the liabilities due and considers whether penalties are due.

Company C demonstrates that the mistake was not made deliberately, and due to the nature of its disclosure and subsequent engagement with HMRC to correct the mistake, no penalties are charged (customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance) .

Identifying a non-compliant customer

Company D is a medium-sized business. HMRC receives information from a third party suggesting that Company D has not issued SDSs to contractors expected to be in scope of the off-payroll working rules.

HMRC contacts Company D to make sure it has implemented the off-payroll working rules correctly. HMRC identifies that Company D has not implemented any processes to meet its responsibilities as a client organisation under the rules.

Due to this non-compliant behaviour, HMRC requests comprehensive evidence and information related to Company D’s off-payroll contractors and identifies that it has not made status determinations nor issued any SDSs. HMRC assesses Company D for the liabilities, and due to its careless behaviour, charges a penalty and applies appropriate suspension conditions.

HMRC shares its view of best practice in relation to implementing systems and processes to support Company D in continuing to meet its responsibilities in the future.

Confirming mistakes have been corrected

Company E is a public sector organisation that has previously received comprehensive support from HMRC following a query about its understanding of the off-payroll working rules, and has self-corrected several errors which resulted in additional tax and NICs being paid to HMRC.

A few months after Company E’s interaction with HMRC, HMRC follows up to confirm the company is continuing to be compliant. HMRC requests a sample of SDSs for any new contractors and an explanation of the company’s current systems and processes.

HMRC identifies that Company E has not maintained the recommended changes to its processes and, therefore, is still not making accurate status determinations.

Through a discussion with HMRC it is identified that, despite previous support from HMRC, Company E is making the same, and new, mistakes and is not taking reasonable care in making status determinations.

HMRC requests all information related to Company E’s off-payroll contractors. Based on the information provided by Company E, HMRC assesses the liabilities and, due to Company E’s careless behaviour, charges a penalty.

Deliberately not complying with the rules

Agency Y is a UK-based agency supplying contractors in scope of the off-payroll working rules to medium and large sized client organisations, including Company C. HMRC is aware that Agency Y has received SDSs and, therefore, Agency Y is a deemed employer under the off-payroll working rules.

HMRC reviews RTI data for Agency Y to be sure employment taxes and NICs are being accounted for correctly. HMRC identifies discrepancies in the RTI returns for Agency Y, highlighting potential tax loss. Given the size of the potential tax loss, HMRC opens a compliance check to investigate if an error has occurred.

HMRC identifies errors, and that these have been caused by Agency Y’s deliberate non-compliance. HMRC raises assessments for the underpaid tax, charge inaccuracy penalties and adds Agency Y to the ‘deliberate defaulters’ list on GOV.UK (deliberate non-compliance involving criminal activity can lead to prosecution).

A collaborative approach to becoming compliant

Company F is a large business that engages contractors via Agency X.

The HMRC Customer Compliance Manager (CCM) for Company F arranges a discussion with the company to assess its processes for applying the off-payroll working rules. The CCM uses their existing knowledge of the business to target the discussion and identify the areas of the off-payroll working rules that Company F might be finding challenging.

Having explored the specific questions raised, it is agreed that HMRC will review a sample of SDSs and the associated systems and process.

Following the review, HMRC believes that although Company F has taken reasonable care, it appears to have made an error in decision-making. HMRC explains that there has been an error, and encourages Company F to self-correct; however, Company F disagrees with HMRC’s interpretation of the law.

HMRC requests further information and works with Company F to understand the determinations in more detail and to clarify any points of contention. With the additional detail, HMRC and Company F agree on the correct tax treatment.

Company F corrects the errors and changes its approach to get things right going forward.

Where a customer and HMRC cannot reach agreement, HMRC will assess for the liabilities it believes are due and the customer will have a right of appeal against HMRC’s assessment.