HMRC issues £257m worth of IR35 bills: takeaways for production companies

As of 6 April 2021 the IR35 rules have applied to medium and large private companies, including film and TV production companies. This means that production company end clients must now assess the employment status of anyone they engage through a loan-out to determine whether they’re employed or self-employed for tax purposes before they begin work.

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If an individual is found to be inside IR35, off-payroll working rules apply. This means that HMRC views that person as an employee and - for tax purposes - the production company must treat them as one and deduct income tax and national insurance contributions (NICs) through Pay As You Earn.

On the extension of the IR35 rules to the private sector, HMRC introduced a 12-month grace period for genuine errors to allow companies time to embed their new processes. As that grace period draws to a close, let’s take a look at recent activity in the public sector - where the IR35 rules have applied since 2017 - to see what lessons can be learned.


2021 public sector audits

In 2021 there were a number of high-profile audits in which public sector organisations were found to have incorrectly assessed whether the IR35 rules applied:

  • The Department of Work and Pensions (DWP) was billed £87.9m for missing tax and NICs owed to HMRC between 2017 and 2021. According to the DWP, it had used HMRC’s Check Employment Status for Tax (CEST) tool to assess the employment status of off-payroll workers, but these assessments were found to be incorrect.
  • BPDTS Ltd - a digital technology company which has since become part of DWP - reached a full and final settlement with HMRC for £6.9m in respect of IR35 liabilities from 2017 to 2020.
  • The Home Office was billed £29.5m plus interest for incorrectly assessing contractors as being out of scope of IR35. Notably, HMRC also imposed a £4m penalty on the Home Office for “carelessness” (although this was later suspended).
  • The HM Courts & Tribunal Service was billed £12.5m for incorrectly assessing the IR35 status of contractors.
  • The Ministry of Justice received a £72.1m bill for incorrect employment status determinations regarding off-payroll workers. According to the ministry, these determinations concerned off-payroll workers whom hiring managers had concluded could send a substitute to deliver work instead of themselves.
  • Finally, the Department for Environment, Food & Rural Affairs was billed £48m for incorrectly assessing contractors to be outside IR35 between 2017 and 2021.

Blocks spelling Tax

Key takeaways for production companies

These decisions - and the substantial sums found to be owed to HMRC - show the importance of taking “reasonable care” when carrying out your IR35 assessments and suggest that reliance on HMRC’s CEST tool will not - in itself - constitute such care.

The CEST tool weighs up whether the financial risk lies with a contractor or a production company and gives a determination based on the information entered by production. However, this tool isn’t specific to the film and TV industry and - as these decisions show - it doesn’t necessarily provide an accurate assessment or give a clear end determination.

Production companies must be able to evidence that they:

  • Have robust IR35 processes and controls in place.
  • Review every relevant contractor promptly and (where necessary) regularly throughout the contract term.
  • Have considered any employment status indicators, such as the ability to hire someone else to do the work (right of substitution) or paying for and providing their own equipment.

These recent decisions also show that IR35 compliance is a key area of priority for HMRC. As we approach the end of the private sector grace period, it’s essential that production companies take the time to evaluate their IR35 processes so that they can avoid any penalties. Because the IR35 rules are a complex and evolving topic, production companies should also consider getting specific advice from a specialist IR35 tax expert.

For more information on IR35 and how the Production Portal helps to simplify compliance, see our Guide to IR35 for production.

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