HMRC is actively investigating IR35 compliance in the oil and gas sector. Although it’ll be a little while before we potentially see the outcome of these investigations in the courts, now is the time for energy businesses to review their approach and stress test their solutions so they can be confident should HMRC investigate.
Meeting the threshold for ‘reasonable care’ responsibility requires organisations to demonstrate several key activities, including ongoing staff training. It’s therefore not a surprise that businesses are turning to ‘mock investigations’ and supply chain audits to stress test risk and identify potential areas for improvement.
Throughout our mock audit investigations, we’ve found a number of common challenges and mistakes. Here are the five most common and, importantly, how to address them:
1. Naming the wrong person as the lead audit contact
Many organisations are using central HR employees to complete IR35 status determinations, who may never have met the person they are assessing and often do not have an accurate picture of their working practices. Not only can this result in incorrect assessments, but also contradictions further down the line.
The person providing the evidence to inform the tax status determination should be someone who works closely with the contractor and has insight into their contractual requirements. This helps ensure all information is accurate and in turn a reliable IR35 assessment will be generated.
It’s this person who should be involved in any audits relating to the contract, as they have the insight and knowledge needed to respond to any questions or queries from HMRC.
2. Misunderstanding questions
IR35 is complex. From carrying out a mock audit to conducting status assessments, it’s not a simple yes / no tick box exercise.
We’ve found that people have been reluctant to ask for support and guidance while making assessments, which often results in questions being answered in the way the respondent thinks they should be, rather than the correct information being provided. This then leads to discrepancies which can cause delays and potentially trigger further investigations.
The only way to address this is to provide the relevant people with training on IR35. Training provides them with the vital knowledge and skills they need and can also reinforce the need to seek expert advice before completing anything that may be complex or unclear.
3. Missing policies and procedures
Policies and procedures offer a wide range of benefits – they demonstrate the business’ approach to IR35 and how it’s consistent throughout the organisation, while helping ensure that managers are trained and up to date with their IR35 knowledge.
All of the vital information needed to carry out a status determination assessment – how the contractor is engaged and what tasks they undertake – is known by the managers as they have a direct relationship with the contractor. By providing these key information holders with IR35 training, potential risks will be easily identified.
4. Making blanket decisions and role-based assessments
Blanket decision-making and role-based assessments can be a significant compliance risk for businesses.
A blanket approach, which sees all contractors assessed as inside IR35, does not meet HMRC’s threshold for reasonable care. This means businesses choose to not use contractors operating via a PSC to avoid doing status determinations. While this could be considered an easy option, it can prove challenging for contractor recruitment and retention, and see projects fall behind timelines as contractors opt for outside IR35 roles.
Similarly, role-based assessments, where businesses make a status determination for one role and then apply that determination to roles that are seen to be similar can result in challenges. The key concern is that this approach assumes that all roles and engagements are the same, which is rarely the case. There are several factors that need to be considered on a case-by-case basis, for example different line managers or different sites might be assessed differently. In addition, if there are several projects going on at once, each might have different contract or working practices.
Only through individual status determinations that take into consideration each contractor’s role and circumstances is the threshold met.
5. Lacking evidence
All contractor statuses need to be monitored and reviewed on an ongoing basis, particularly if there are any changes to the contract or working practices. Throughout the contract evidence should be gathered so if HMRC make a challenge to a status determination the business has evidence to support their decision-making.
An evidence pack for HMRC should include the business’ overarching approach to IR35, each individual assessment and regular re-assessments as well as any other evidence to demonstrate records of training and IR35 specific policies and procedures. Together, these documents can demonstrate to HMRC how the business is compliant and met the reasonable care threshold.
Putting IR35 solutions to the test
With HMRC actively investigating businesses, mock audits provide the ideal environment to stress test an IR35 solution. Helping to identify any pitfalls or mistakes that need to be rectified, the process provides a business with confidence in their solution and compliance.