Back in April 2021, HMRC introduced changes to the ‘off-payroll working rules’ which govern how businesses engage contractors, also known as ‘IR35’.With enquiry letters from HMRC starting to land in inboxes across the haulage sector two years on, it’s a good time to examine how to manage these checks and avoid the need for further investigations.
What do the changes mean?
The 2021 changes to the off-payroll working rules made it the responsibility of hirers to ensure that contractors are categorised correctly for tax purposes, and to ensure that the right taxes were being paid.
Areas of the transport sector reliant on self-employed drivers were hit particularly hard by this shift in policy. HMRC issued explicit guidance advising that HGV drivers using a client’s vehicle are likely to be classified as an employee, and thus fall ‘inside IR35’.
HMRC’s view is that if the driver provides the vehicle, then they are more likely to be “outside IR35”. Whilst HMRC’s view here is very broad brush and may not be correct for all contracts it does point towards their starting position when assessing status.
Many hirers are therefore no longer able to make a gross payment to the contractor, as many had done previously. They would instead need to either manage payroll for the worker under PAYE or hire the contractor through an umbrella company that could manage this for them.
For this reason, the transport sector looks to be one of the first targeted by HMRC for compliance investigations, with haulage and logistics firms across the UK now finding HMRC letters landing on their desks.
So, if HMRC does make contact with your business, what should you expect? And more importantly, what do you need to do?
The initial engagement
From examples we have seen so far, the investigation timeframes set by HMRC are tight right from the beginning with acknowledgement of receipt of the initial HMRC letter required in approximately 7 days, although the letter will specify the date you need to respond by. Within this letter will also be detail of what evidence and documentation you will need to provide as well as the tax year that the investigation is focused on.
From our current insight based on client experience, this could cover up to 10 areas including: the processes you have in place for off-payroll working; whether you engage with PSCs; and your visibility of information from intermediaries – agencies or labour providers – that are used.
Added to this, specific detail is likely to be requested surrounding the exact number of off-payroll workers engaged by the company, their IR35 status determination and details around engagement and the contracts in place with workers. You are also likely to be asked whether the Government’s CEST tool (Check Employment Status for Tax Liability) was used and if you believe any services were fully contracted out or exempt from IR35.
This is a lot of information to collate and typically HMRC provides a month (with a set deadline) to allow time for the data to be gathered. Although this may sound like a generous amount of time, it relies on businesses having evidence not only of IR35 status outcomes but also of the processes and procedures in place across the business to demonstrate compliance and ‘reasonable care’.
Following submission of all documentation requested, roughly a week later HMRC will set up an interview to ask questions on the information submitted and to outline whether the correct detail was shared.
Preparing for the interview
Typically hosted remotely, HMRC will use the hour-long interview to delve into the background and detail of the company’s IR35 processes, status determinations and evidence. This session is relatively short but is your opportunity to convince HMRC that you have a good understanding of your obligations and you have these in hand so it’s important to be prepared.
Types of questions that may be asked could be around policies and procedures – who wrote them, when they were issued, how many agency workers are engaged and the reasons why. You can also expect questions surrounding your use of the CEST tool or, if not used, how you determined IR35 status as well as what evidence you have to support the outcome.
For transportation businesses this is particularly important for any HGV drivers deemed outside IR35 as this directly conflicts with HMRC’s general guidance.
You need the right people
Due to the level of detail that the interview will go into, there’s no limit to the number of people that can join the meeting. This is vital for businesses where responsibility and insight on the IR35 process is spread amongst departments and teams, as you need to have the right people on the line. This can help prevent simple mistakes and ensure that questions are answered correctly and in detail. It will also prevent responses of ‘I don’t know’ which can trigger a second interview session with HMRC.
After the interview, you can expect to hear back from HMRC with the outcome via a letter within two weeks. This will outline whether any further action (such as follow up meetings or additional documents to be supplied) is required or if you’ve been found compliant based on the information supplied.
Preparing for a potential HMRC investigation into your company’s IR35 compliance can be stressful, particularly if the responsibility and evidence is spread out amongst the business. But, by putting it off, there is a real risk HMRC could knock on the door before you’re ready.
Now is the time to seek expert guidance and support to collate the correct information and run a mock audit to help identify – and importantly address – any potential problem areas. This will not only help ensure compliance but also confidence and familiarity with HMRC’s processes should you be investigated.
Matt Fryer, Managing Director of Brookson Group, a People2.0 company