After numerous UK government departments revealed a combined IR35 tax bill of approximately £244m for non-compliance, UK energy businesses have been encouraged to prioritise their IR35 compliance early in 2022 by insurance specialist, Qdos.

This advice comes ahead of the expiration of the 12-month ‘soft-landing’, which means businesses could be issued multi-million pound financial penalties for non-compliance from 6th April 2022.

IR35 is tax legislation designed to prevent contract workers from operating as ‘disguised employees’, which occurs when a contract worker is engaged by a business as self-employed (outside IR35) despite the relationship reflecting employment (inside IR35).

Last year, IR35 reform was introduced in the private sector, making medium and large businesses responsible for determining the IR35 status of contractors – assessing if the work is carried out in a manner consistent with a business to business arrangement or one that reflects employment, meaning the contract worker should be taxed as an employee.

Included in the reform was the shifting of the risk, meaning whichever company pays the contract worker – whether the client or the recruitment agency – carries the tax liability for mistakes and non-compliance.

HMRC has started issuing compliance letters to energy businesses that, from 6th April 2022, could also face significant financial penalties for mistakes after the ‘soft-landing’ expires.

Qdos CEO Seb Maley commented: “Numerous UK energy businesses have already been approached by HMRC regarding their IR35 compliance and now, with the tax office soon able to issue financial penalties, I fully expect activity in this area to ramp up even further.

“Recent developments in the public sector show the staggering cost of non-compliance, with tax demanded by HMRC from various government departments sitting close to £250m – a figure that includes millions of pounds worth of penalties, issued due to the careless application of IR35.

“It therefore goes without saying that energy businesses, that rely on the specialist skills and flexibility of contract workers, need to be prepared for a potential IR35 enquiry, know how to handle it appropriately and review the processes they have in place to ensure IR35 compliance.”

The information HMRC could request from businesses includes:

– The specific processes in place to manage IR35 reform

– How many contractors are engaged

– How IR35 status is assessed, ensuring ‘reasonable care’ is taken

– If contractors are engaged directly or via agencies

– How many contractors sit inside/outside IR35

– How many transferred inside IR35 upon the introduction of IR35 reform