How to be ready, now HMRC’s soft-landing period for IR35 in the private sector is over.
HMRC’s grace period for IR35 penalties ended in April. This means that for any company that ‘accidentally’ breaks the rules, they are likely to be liable to face penalties of up to 100% of the unpaid tax due to their inaccuracies.
Since 6 April 2022, HMRC now charges penalties for inaccuracies based on the reason for that inaccuracy. The penalty regime breaks down as follows:
- A penalty of 30% of unpaid tax if HMRC deems that you were careless about your employment status but did not know it was inaccurate
- A penalty of 70% of unpaid tax if HMRC finds that you knew you were within IR35 and yet chose not to act
- 100% of unpaid tax if HMRC finds that you have actively tried to conceal your IR35 status and underpayment of tax
Businesses can avoid a penalty if they can prove to have taken ‘reasonable care’. At its basic level, this means checking with a tax adviser or HMRC if unsure about anything. Other examples include using a specialist team to carry out all off-payroll working compliance activity (this is common in sectors such as financial services, and oil and gas).
HMRC may publish details of organisations that deliberately get their affairs wrong to encourage them to put their tax affairs in order, in certain circumstances.
In essence, the updated IR35 rules break down as follows:
- The end user, in most cases, is responsible for determining whether the working arrangement is in scope of IR35 or outside it.
- If considered ‘in scope’ of IR35, the arrangement is considered by HMRC as full-time employment and subject to NICs and other employment rights.
- If considered ‘outside’ of IR35, HMRC view the contractor as genuinely self-employed due to all or some of the following conditions:
- The contractor chooses when, where or how they work.
- They are responsible for their own taxes.
- They have more than one client.
- They may tender for contracts.
We spoke to accountants who specialise in IR35 and off-payroll working tax rules to find out how businesses can avoid facing penalties.
Mutuality of Obligation gives a strong indication of IR35 status
James Poyser, CEO, inniAccounts & founder of offpayroll.org.uk
The biggest challenge for IR35 is identifying if someone is truly operating as a business (thus ‘outside IR35’) or are actually a disguised employee (‘inside IR35’). One of the key tests a judge may consider involves Mutuality of Obligation (MoO): are you paid for simply being ‘available’ for work, even if your client has no work for you?
If you’re a contractor or consultant, then you may expect a client to hire you for a specific task with no obligation to provide you with further work once the contract expires.
The absence of MoO is a strong indication that someone is outside IR35, and many IR35 court cases have been won with this approach.
If an inside IR35 status is determined, HMRC will expect the fee payer to account and pay the income tax and NIC required via PAYE. HMRC can recover any unpaid tax or NIC from any ‘relevant person’ in the chain. This can include anyone above the fee payer.
Next steps: companies must ensure continuous review of status and ensure the full supply chain for employment is compliant.
Verdict: Considering Mutuality of Obligation gives a strong indication of IR35 status.
HMRC can’t go easier on businesses
Joanne Harris, Head of Technical, Compliance and Payroll at SJD Accountancy
End hirers/agencies must be seen to have exercised reasonable care in assessing the IR35 status of a contractor, and not doing so could risk them being issued a penalty. The percentage of the penalty will vary depending on whether the non-compliance was accidental or deliberate and is decided on a case-by-case basis. For any deliberate or concealed action, penalties can be as much as 100%.
The penalties are standardised and remain in line with the responsibility that was previously in place for PSC’s. In light of this, it would be unfair to have lighter penalties or be seen to “go easier” on businesses who likely have deeper pockets than individual contractors.
Penalty percentages can vary depending on whether the non-compliance was intentional or not, and honest mistakes should be treated fairly. HMRC have a charter outlining how they will behave in these investigations.
Next steps: As with any investigation it is essential that they seek professional advice as possible, liaising with a qualified tax advisor who can offer advice and work on their behalf to present a strong case is particularly important if they disagree with HMRC.
Verdict: The penalties make sense – businesses need to give this serious thought and engage with tax advisors to ensure they are following the rules.
Send employment status determinations to agencies/workers and review regularly
Chris Barnard, Head Accountant, Accounts And Legal
From 6 April 2022, all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.
The first and most crucial point is to establish whether you are ’employed’ or ‘self-employed’ under HMRC’s terms. There are three main tests to decipher this – Personal service, Control and Mutuality of obligation. You need to pass one of the tests to be outside of the off payroll working rules.
Next steps: Businesses should speak to a professional advisor to make sure they are the right side of the off payroll working rules. It is important to send employment status determinations to agencies or directly to workers, then review if you are the deemed employer and responsible for deducting Income Tax and National Insurance contributions.
Verdict: Send employment status determinations to agencies/workers and review regularly.
Consult HMRC’s CEST tool and seek professional advice
Bev Wakefield, co-founder and director, Vibrant Accountancy
Medium-large companies are responsible for determining scope of IR35 but for small companies, it’s the responsibility of the freelancer themselves.
Many companies have taken a blanket approach to these rules but that’s not what should be done. Instead, reasonable care must be taken to assess each person and circumstance.
Next steps: To help companies and contractors ascertain IR35 status, HMRC have set up an online Check Employment Status for Tax (CEST) tool. While not ideal for every circumstance, it’s a great starting point. People should also consider seeking professional advice, too.
Verdict: Consult HMRC’s CEST tool and seek professional advice.
Annie Makoff is a freelance journalist and editor.