Companies seeking investment or sale should review IR35 processes and revisit checklists as HMRC ramps up its new regime

HMRC's "soft landing" enforcement policy for the first year following the commencement of the private sector IR35 regime has now expired. In the future, HMRC is more likely to impose sizeable penalties (in addition to the tax assessment and interest) where it finds that those making decisions about or implementing IR35 processes relating to the private sector have been "careless".

And it is expected that HMRC will enforce IR35 against the private sector at least as enthusiastically as it has against the public sector. Consequently, many companies, particularly those who are seeking investment or sale, are now reviewing their IR35 processes.

As HMRC begins to flex its muscles and increase activity in this area, businesses need to take note of and assess their IR35 risk. They should also look to pragmatic advice on to how to mind the IR35 gap: that is, between existing or previous approaches and what is required from them now by the new regime. Specifically, for those engaged in merger and acquisition (M&A) activity, there are a range of measures that could help identify and address the presences of IR35 risk in a corporate deal prior to sale or investment.

IR35 checks for M&A

  • Stress test prior to sale. IR35 is now a key due diligence issue. Companies who either supply or use large numbers of contract workers or consultants need to review their IR35 processes ahead of going to market in order to avoid due diligence problems and potential deal-breaker situations.
  • Improve your approach to "special cases". You may feel you need to make occasional exceptions to your original IR35 approach so that you can better access top talent in the current talent crisis. How can you safely do this? Are these safe as HMRC enforcement activity increases?
  • Check whether your insurance solution exposes you to more risk than it helps you avoid. Many clients and suppliers rely on insurance-backed IR35 checking tools. Some of these tools are regarded by many commentators as generating too many "outside IR35" determinations. Many are asking if it unwise in these circumstances to rely completely on untested insurance.
  • Check IR35 processes set up by suppliers. End users are aware that liability is likely to pass to them if the staffing supplier they hire workers through cannot cover IR35 claims. They are becoming more aware of the need to use reasonable care when issuing status determination statements (SDSs) and are starting to question whether SDSs tools and processes put in place, in many cases with the help of staffing suppliers, are adequate. If they are not, they may be primarily liable for the IR35 liabilities and may face penalties for being "careless" on top of this. Consequently, many are now double-checking their IR35 processes.
  • Check SOWs. If you have relied on statement of work (SOW) contracts to remove the need to carry out IR35 status determinations or to avoid the need to operate an IR35 process altogether then, following HMRC's recent guidance on what constitutes a "contracted out" service, SOW may not provide the solution to IR35 you hoped it would. Many are, therefore, revisiting SOW arrangements so that they can withstand any HMRC investigation.

Osborne Clarke comment

Many reviews of IR35 compliance will reveal potential liabilities. Using a regulated law firm to carry out the review will help ensure that advice is subject to legal privilege and generally non-disclosable. Many organisations are involving advisers whose advice is not privileged and will generally be disclosable to HMRC and potentially others as part of an investigation or any subsequent litigation. A legally privileged review of IR35 processes and contracts expertise can help identify any gaps and risks that need to be addressed and can help reduce IR35 tax risk – and reassure investors.