Are Revenue officers trained to judge IR35?

Employer compliance reviews – often known as PAYE audits – are the routine checks by the Revenue to ensure compliance with the legislation regarding the handling of PAYE and NIC by employers.

Reading the Revenue's own manuals raises an issue about whether the officers carrying out these reviews are sufficiently trained in IR35 issues?

All businesses will receive an employer compliance review from time to time – every four to five years for a large business, less frequently for smaller businesses.

Because IR35 status affects the amount of PAYE and NIC that the business has to account for the Revenue considers that checking the IR35 status of the business’s contracts is a legitimate part of an employer compliance review.

Some organisations are reporting that a significant number of employer compliance reviews turn into an IR35 status challenge.

I have been looking through the Revenue’s internal guidance on the conduct of the Employer’s Compliance Review and the role of the Employer Compliance Officers (‘ECO’) who undertake this work. The Revenue’s internal guidance is set out in their Employers Compliance Handbook (ECH) which is available online at:

ECH

The Revenue sets out their Employer Compliance strategy as follows:

”The Department has an overall Compliance Strategy that applies to all areas of compliance, not just Employer Compliance. The strategy aims to

· encourage and improve compliance with the law and

· deter non-compliance by identifying it and putting it right.

The aims of the ECU within this strategy are to

· help educate and encourage employers and contractors to comply with their statutory duty to o provide timely and accurate information, and o remit deductions when due

· deter the evasion or late payment of tax and NICs

· detect irregular practice and thereby deter non-compliance

· obtain current compliance with arrears paid in full, at the smallest cost to public funds

· help protect the National Insurance Fund (NIF)

· confirm the correct deduction of Student Loans

· establish payments have been correctly made in respect of SSP, SMP and Tax Credits.

The Inland Revenue must, where possible, police all areas of potential non-compliance.”

It also has clear cut rules about what ECO’s can and cannot deal with. For example:

“ECO’s are authorised to inspect employer’s records only on completion of the Employer Compliance Foundation Course.

ECO’s are authorised to inspect contractor’s records only on the completion of the Construction Industry Scheme Course for Employer Compliance.”

It is encouraging to see that they have clear guidelines about what ECO’s can and cannot do without appropriate training. Seeing this I thought it would be useful to see what the Revenue lays down as the necessary expertise for an ECO, given they can play a role in identifying IR35 issues.

Again helpfully the manual sets out in some detail what ECO’s need to have mastered. In ECH 2025 on Training and ECH 2030 on an ECO’s knowledge and qualities the Revenue lists areas where they must have received training and have expertise.

Their training needs are as follows:

”ECH 2025

The training should ensure that the ECO will have a sound working knowledge of an employer’s responsibilities in relation to

· Income Tax (PAYE)

· Schedule E

· CIS

· NICs

· SSP

· SMP

· Tax Credits

· Student Loan Deductions.”

While in terms of knowledge the requirements are:

” ECH 2030

In order to carry out their duties effectively the ECO should

· have a sound knowledge of o PAYE o Schedule E o NICs o the types of books and records associated with the preparation and payment of wages, salaries, benefits, SSP and SMP o basic book-keeping (an understanding of the principles of double-entry book-keeping which are covered in the Employer Compliance Foundation Course)

o CIS (if required). “

Now call me naïve but I was rather surprised that in all this detail there is no discussion of understanding the status issues that separate employment and schedule E from self employment schedule D!

It seems that the Revenue is happy for these key initial reviews of IR35 status to be carried out by staff who appear not to be required to be trained in and knowledgeable about the distinctions between employment and self employment. This may explain why, later on in the ECH, where the Revenue does consider briefly IR35 and status checks, they require all borderline or disputed cases to be referred to a Status inspector (ECH 13345).

This does raise the issue, however, of whether the ECO’s are sufficiently experienced to know when the situation is borderline? It perhaps also explains why it appears that many Employer Compliance Reviews of freelancer businesses are turning into IR35 investigations. If ECO’s are ill equipped to deal with status issues then perhaps they are erring on the side of caution and referring most cases to Status officers to let them sort out the issues?

The message seems to be that if you take the time to understand the main status issues then you may well have a better understanding of how they affect a typical freelancer than the average ECO. If you get an employer compliance review your aim should be to convince the ECO that you (or your advisor) know as much if not more than they do about the issues. Hopefully ECO’s will feel under some pressure not to refer any cases to Status officers where they might end up looking foolish. Hopefully that gives a well informed freelancer or well informed professional adviser a slight edge!