HMRC is seeking to generate an extra £29.7m from IR35 investigations into contractor’s employment statuses, according to new data.

The figure is an estimation of the maximum amount HMRC can generate before investigations into contractors and ‘disguised employment’ have been concluded.

Mike Crellin, director at UHY Hacker Young, said: “HMRC’s crusade against contractors is far from over.

“HMRC is looking at employment status extremely closely. These estimates show that HMRC thinks there is more revenue that could be squeezed out of the compliance work in this area. Contactors can expect HMRC to continue to take a very tough line.

“Just this year HMRC introduced the controversial loan charge to claw back up to 20 years of backdated tax from business, including contractors who reduced their tax liabilities through tax planning schemes.

“IR35, the legislation targeting people who wrongly register as self-employed to reduce their tax and NIC, is going to be extended to the private sector next year which will likely create more confusion about the employment status of contractors. This is likely to see more mistakes being made – and more fines.”

The release of this data comes as HMRC is ramping up IR35 investigations into various industries that employ a high number of contractors.

One example, as Accountancy Age reported in July, is the television industry. The tax man is targeting TV presenters by analysing a variety of factors that they say will help them determine their employment status.

Other industries will also face heavy scrutiny, such as IT, engineering, and construction as well as many interim management roles which all employ a high number of freelancers.

How can businesses and contractors protect themselves from the impact of IR35?

There are concerns about the tool provided by HMRC, known as ‘CEST’, to help employees determine whether they will be considered a freelancer or not by HMRC. In HMRC’s words, CEST will “Find out if you, or a worker on a specific engagement, should be classed as employed or self-employed for tax purposes.”

The concerns centre around the accuracy of the results that the tool gives. According to HMRC, the tool arrives to a conclusion 85% of the time, with 15% of cases requiring further investigation.

But there has been debate between HMRC and practitioners around the accuracy of these results, with recent high-profile cases involving TV presenters highlighting the issue.

Mike Hodges, partner at accountancy firm Saffery Champness said: “It is going to be a case of being clear as to who has control over how an engagement is controlled.

“HMRC has promised that the CEST online status tool will be beefed up, and those engaging workers on a self-employed basis will be looking to be able to rely on this (provided they give honest answers) as their protection.

“The recent TV cases have perhaps thrown doubt on whether the CEST tool will be quite the panacea it is hoped, and we will have to wait and see.”

Victoria Goode, consultant partner in the employment team at law firm Lewis Silkin gave a comprehensive list when asked what she would suggest to businesses in order to protect themselves from IR35 legislation:

  • Complete due diligence on the labour supply chain to identify those contracts where the freelancer is providing their services via a personal services company. This includes those arrangements where the business is contracting via an agency rather than directly with the freelancer’s personal services company.
  • Establish a robust process and controls for recording the use of freelancers centrally.
  • Ascertain how those contracts are being operated in practice.
  • Establish a robust process for determining employment status on a case by case basis. HMRC’s Check Employment Status Tool – CEST – provides a starting point for determining status, and has the advantage of generally being binding on HMRC). However, CEST is a very blunt tool  – in some situations it may not provide a determination or the determination it provides may be out of line with the facts. Businesses therefore need a back-up process.
  • Identify who is going to apply the IR35 rules and make sure that they are trained to do so.
  • Identify any freelancers for whom by tweaking working practices business could ensure that they are genuinely outside IR35.
  • Ensure valid status determination statements are provided to the freelancer including reasons for the determination.
  • Decide which freelancers are business critical and for whom therefore the business is prepared to pay the extra costs. For those contractors who are not business critical, consider whether those contracts can be terminated.
  • Monitor each freelancer’s status and re-run the determination every 6 months or so and each time there is a change in circumstances.
  • Ensure that there is a properly drafted contract for each engagement which reflects the working arrangements and status determination and gives the business the right to deduct PAYE and employee NICs from the fees if required.
  • Consider whether any process and/or systems changes are required, for example on-boarding processes and payroll and accounts payable systems.
  • Consider whether using freelancers are still the best solution for the resourcing needs of the business.

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