Olivia Bailey, solicitor in Harrison Drury's employment law team, considers the off-payroll working rules for private sector businesses, one year on from their implementation.

The IR35 rules were introduced by HMRC on April 6, 2021 to reduce tax avoidance by ensuring that contractors working in the same way as employees, pay the same tax and national insurance contributions (NICs) as an employee.

In the private sector, the off-payroll working rules, sometimes known as IR35, apply to the contractual relationship between a worker (typically a contractor), an intermediary (which is usually the worker's own limited company) and a client (the party receiving services from the worker).

Since April 6, 2021, medium and large private sector clients have been responsible for determining the status of any worker providing services to them via an intermediary. In these circumstances, the client is required to confirm whether the worker would be regarded as an employee, if the worker was providing personal services directly to the client, rather than through an intermediary.

In essence, the rules create a hypothetical employment contract directly between the client and the worker, requiring the payment of tax and NICs.

To assist businesses to establish if the IR35 rules apply, HMRC offers the 'Check Employment Status for Tax' (CEST) tool and has confirmed that it will stand by all determinations produced by the tool, if the information given remains accurate.

For a closer look at the off-payroll working rules and what to consider when determining employment status, read our previous article: Applying off-payroll working rules (IR35) for private sector companies.

The first year of the IR35 rules

As expected, the first year of implementation of the IR35 rules (from 2021 to 2022), has been relatively quiet. There simply hasn't been a large flurry of cases where businesses in the private sector have fallen foul of the new rules. Instead, HMRC seems to have kept by its announcement that the first year would be used to educate those affected by the changes, rather than punishing businesses making unintentional errors.

However, a number of recent decisions against public sector entities (required to follow the IR35 rules since 2017) give a flavour of how HMRC may enforce the rules in the future and emphasises the real danger to private sector businesses of getting it wrong.

In 2021, HM Courts & Tribunal Service and the Department for Work & Pensions paid large sums (£12.5 million and £87.9 million respectively) to HMRC relating to incorrect status determinations over a three year period, while the Home Office paid a total of £33.5 million for errors in the assessment of contractors and 'careless' treatment of the IR35 rules, made up of £29.5 million to cover income tax, NI contributions and interest and £4 million in penalties.

As the one-year anniversary approaches, it is understood that HMRC has started to carry out compliance investigations into several private sector businesses working with contractors in industries such as oil and gas, finance and banking. Therefore, as HMRC's relaxed approach to enforcement appears to be at an end, businesses should take steps to ensure that they have a process in place for engaging contractors and status determinations are carried out appropriately.

However, care should be taken; even where businesses are using HMRC's CEST tool to determine IR35 status, it alone does not protect against fines. The questions asked by the CEST tool require an understanding of employment status principles. Therefore, businesses should seek advice from employment specialists in this regard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.