Recent changes to off-payroll working (IR35) rules have had a bumpy introduction. Just over a week ago, parliament’s Public Accounts Committee reported that there is “widespread non-compliance” with IR35 tax reforms in central government departments. It also noted that HMRC “rushed implementation of the reforms, provided poor guidance, and public bodies struggled with its tool to assess status.” Despite this, HMRC’s latest Employer Bulletin states that, after a 12-month moratorium, it will now start imposing IR35 penalties for mistakes in applying the new rules.

What is IR35?

IR35 tax legislation was first introduced in 2000. The idea behind it was to identify ‘disguised employees’ hired as contractors. Government was concerned that contractors, despite working under the same conditions as employees, were using personal service companies to reduce their tax bills. The legislation introduced a number of tests to determine whether someone was a genuine contractor or a ‘disguised employee’. To qualify as a contractor, you need to meet the following criteria:

  • Supervision, direction, control. You must have freedom over how you complete your work. For example, you would normally decide your own working hours and not have your client overseeing and guiding your work excessively.
  • Substitution. You should have the freedom to send a substitute to complete your work.
  • Mutuality of obligation. There should be no obligation for your client to offer you work, or for you to take it. You should also be free to work for other clients simultaneously.
  • ‘Part and parcel’. You should not become ‘part and parcel’ of the contracting organisation. For example, if you have employees reporting to you, this suggests you are working as an employee yourself.

There are other criteria used to determine whether a person is a contractor or a disguised employee. For more details on whether a worker is deemed to be ‘inside’ or ‘outside’ of IR35, see our blog post on the topic or take a look at the official government guidance.

What are the changes to the IR35 rules?

Changes to the off-payroll working rules were introduced in April 2021. Before then, it was a contractor’s responsibility to determine their employment status for tax purposes. After this date, the responsibility moved to any large, medium-sized or voluntary organisation that engaged them. In other words, companies now face IR35 penalties for getting the rules wrong.

What does HMRC say about IR35 penalties?

In a nutshell, HMRC has lifted a 12-month period of grace for organisations that have had to get to grips with the new rules. From now on, HMRC will start charging penalties for mistakes in applying the rules. It says:

The published compliance approach states that customers will not have to pay penalties as a result of mistakes made when applying the rules in the first 12 months after the rules took effect (April 2021), unless there’s evidence of deliberate non-compliance. This is regardless of when the inaccuracies are identified. This first 12 months has now ended, and penalties may now be charged on any inaccuracies relating to the operation of the rules that occur after April 2022.

What action is HMRC taking?

HMRC recently sent out compliance letters to large businesses in the oil, gas and financial services sectors. These query organisations’ application of the IR35 rules.

HMRC is particularly keen to determine whether businesses have documentary evidence to support their application of the off-payroll working rules. The taxman is also reviewing whether businesses that treat contractors as ‘off-payroll workers’ have clearly defined them as such within their payroll using the ‘off-payroll worker’ indicator flag. Reports suggest that many businesses have not done this.

How can I avoid IR35 penalties?

If you are worried that you may not be complying fully with the new IR35 rules, talk to us. We can review the documentary evidence you use to support your off-payroll decision making, as well as check that your payroll is compliant.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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About Karen Jones

Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.

With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.

Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”

Karen’s specialist skills:

  • Personal Taxation
  • Tax Efficient Planning
  • Trust Administration
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