HMRC has published guidance on how it intends to support companies seeking to comply with the upcoming IR35 changes including waiving penalties for accidental inaccuracies for the first 12 months.
It will be mandatory for employers to assess a contractor’s employment status for tax purposes. If employers fail to do so, they may face a hefty fine.
In the first 12 months however, penalties for “accidental” inaccuracies will be waived if they have taken reasonable care to apply the rules correctly, unless there’s clear evidence of deliberate non-compliance. This is to encourage businesses to get their affairs in order and comply with tax rules. With the majority of businesses wishing to correct their tax affairs, this will filter out the “deliberate defaulters” and those contractors who engage in artificial employment arrangements.
Penalties will still however be imposed on companies who fail to demonstrate reasonable care.
The government will not be determining employment status however they will provide support and advice on best practice to help businesses fulfil their obligations.
What is IR35?
HMRC introduced IR35 in 1999. The intention was to tackle “disguised employment” and prevent individuals working in a manner which was effectively the same as employees, but under the guise of limited companies. Companies engage contractors through an intermediary, often a personal services company. These self-employed individuals do not have to pay national insurance and and benefit from lower income tax.
HMRC claim that currently only 1 in 10 contractors, who should be paying these taxes are doing so and that these changes will bring in an additional £3.1bn in additional tax revenue between 2020 and 2024.
Who is affected by IR35 upcoming rules?
The new IR35 rules come into effect from 6 April 2021.
• Contractors providing services to medium and large businesses;
• Fee-payers in the recruitment sector; and
• Medium and large businesses in private sector that are end user of the worker’s services.
Originally, the onus was on individuals to assess and then declare to HMRC that they fell under IR35. However, HMRC are now tightening the net on these self–employed workers by shifting that onus to businesses to determine the status of their contractors.
Do the IR35 rules affect my company?
Companies will not have to comply with the new IR35 legislation if they satisfy two or more of the following criteria:
(a) an annual turnover of not more than 10.2 million;
(b) balance sheet total of not more than 5.1 million; and
(c) number of employees of not more than 50.
How has Covid-19 impacted IR35?
Contractors have said that this brief reprieve has granted them temporary relief in times of great job uncertainty, particularly where contractors are often the first overhead to be cut from businesses as they handle the aftermath of the pandemic and its financial impact. This may drive many contractors to seek full employment within their companies to ensure job security moving forward.
What is a tax penalty?
Tax penalties are incurred if you fail to declare tax correctly, on time, complete the right tax returns or pay tax when it is due. HMRC will determine the level of penalty to be charged depending on the taxpayer’s conduct.
How the inaccuracy penalty is calculated
If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the amount of the extra tax due and the reasons for the error. For example:
- If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the amount of the extra tax due and the reasons for the error. If the error is careless, the penalty will be between 0 and 30% of the extra tax due.
- If the error is deliberate, the penalty will be between 20 and 70% of the extra tax due.
- If the error is deliberate and concealed, the penalty will be between 30 and 70% of the extra tax due.
The penalty can be reduced if you tell HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:
- telling HMRC about the errors;
- helping HMRC work out what extra tax is due; and/or
- giving HMRC access to check the figures.
How do I appeal a tax penalty?
If a taxpayer disagrees with HMRC, the taxpayer has the following options:
Stage 1: Request a HMRC review: A taxpayer can appeal in writing within 30 days of HMRC’s notice of their decision. HMRC can offer an internal review of the disputed decision (or the taxpayer can request this procedure at any time). The review is an entirely internal procedure completed not by the original HMRC decision maker but by a different HMRC officer.
Stage 2: Appeal to the Tax Tribunal: A taxpayer can appeal to the First Tier Tax Tribunal if the taxpayer cannot agree their position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if a taxpayer does not agree with the decision. There are strict time limits for appealing to the Tax Tribunal and you should seek legal advice as soon as possible.
What can we do for you?
Our expert tax litigation team can:
- assess the employment status of your current contractor workforce and produce a status determination statement for each contractor as to whether they fell under IR35
- review your contractual terms to ensure the business has all the protection required
- assist with drafting communications with contractors and their line managers
- assist with liaising with HMRC where necessary
Expert London Tax Investigation Lawyers
If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.
Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.
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