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HMRC adopts light touch for first year of IR35

IR35 was introduced to tackle the problem of ‘disguised employment’. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract, so they become disguised employees. This can save the engaging organisation a significant amount of money as they no longer have to pay employers’ National Insurance Contributions, and it also means they do not have to offer any employment rights or benefits.

A business will need to consider the off-payroll working rules if they provide services to a client through an intermediary or hire people who provide their services through an intermediary to clients. The intermediary can be a worker’s own limited company known as a Personal Service Company (PSC), a partnership or another individual.

There are different roles and responsibilities for applying off-payroll working rules depending on whether a worker provides their services in the public or private sectors.

Changes in 2021

From 6th April 2021, HMRC is extending IR35 to the private sector, and medium and large private sector businesses based in the UK will be responsible for checking the status of any contract worker they use. They will also, if the rules apply, have to pay the tax and national insurance due.

HMRC has announced that for the first year of IR35, companies will not have to pay penalties for inaccuracies relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.

HMRC has also said that it will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021/22, unless there is reason to suspect fraud or criminal behaviour.

In essence, HMRC will support customers who are trying to do the right thing and comply with the rules. They will help customers meet their responsibilities under the off-payroll working rules. Where customers make a mistake, assistance will be given to help correct it, and checks will be carried out to ensure that the necessary corrections have been made.

HMRC will challenge deliberately non-compliant customers, as well as tax avoidance schemes that purport to avoid the off-payroll working rules or otherwise reduce the tax payable.

rradar tax advisor Caroline Lamyman said:

“This announcement by HMRC confirming that penalties will not be charged for accidental errors in the first year comes just weeks ahead of the introduction of the new off-payroll working rules. The government has realised the extra burden these rules may place on businesses during what is considered an already turbulent time due to COVID-19.

Business must be aware that any tax which is discovered to be owed by companies and agencies that have failed to demonstrate reasonable care will still be recovered through these penalties and It is clear that HMRC will take a very dim view of ‘deliberate defaulters’, a category that may include tax avoidance schemes.”

Written by

Caroline Lamyman, Tax Advisor at rradar