IR35 compliance review: HMRC applauded over handling of 18-month investigation

HM Revenue & Customs (HMRC) is being applauded for its “pragmatic” approach to conducting an 18-month IR35 compliance check on a global manufacturing business that engaged around 300 contractors, with the vast majority working in IT or technology-related roles.

The company in question, which has requested to remain anonymous, first found itself in HMRC’s crosshairs in September 2021, when the government tax collection agency wrote a letter to it querying its IR35 compliance procedures.

The organisation had more than 300 contractors engaged at the time who were predominantly working on an outside IR35 basis, and it was subject to numerous questions about how it determined the employment status of the contractors on its books.

The investigation is thought to have been among the first set of compliance checks HMRC had embarked on since the onset of its reform of how the IR35 rules work in the private sector, which occurred in  April 2021.

At the time, the medium-to-large businesses in scope of the reforms were told HMRC would be providing a 12-month grace period where it would take a “light-touch” approach to enforcing the reworked rules to give businesses time to get to grips with their new-found responsibilities.

This is because from April 2021, medium-to-large private sector businesses became responsible for determining how the contractors they engage should be taxed, based on the work they do and how it is performed.

Previously, it was up to contractors to decide for themselves whether their engagements meant they should be treated as an employee for tax purposes (known as inside IR35) or as an off-payroll employee (outside IR35).

However, in the view of HMRC, this method of self-declaration made it possible for some contractors to deliberately misclassify their engagements so they could artificially minimise the amount of employment tax and National Insurance Contributions (NICs) they are liable to pay.

In the case of this unknown firm, it is unclear what gave HMRC cause to place the company under investigation, but the organisation credits the work it did with contracting authority Qdos to ensure compliance with the reforms with prompting the agency to drop its investigation after 18 months.

Seb Maley, Qdos CEO, said that what was notable about the case was how “pragmatic” HMRC had been in its approach to the investigation, which should go some way to easing any concerns other firms might have about finding themselves subject to a similar investigation.

“There has been so much concern surrounding the off-payroll working rules in recent years – to the point where businesses have forced contractors inside IR35 or stopped engaging them altogether for fear of falling foul of this complex legislation,” said Maley.

“Above all else, the successful closure of this IR35 check – where the majority of contractors were engaged outside IR35 – is proof that the off-payroll working rules can in fact be managed. For risk-averse businesses, this should be a turning point.”

Maley added: “When it comes to IR35, in the past HMRC has been guilty of jumping to conclusions, accusing parties of non-compliance before having established the facts. The tax office’s pragmatic approach to this check was refreshing. Long may it continue.”