UK tax collector won't probe businesses for compliance with IR35 rules unless there's reason to suspect naughtiness
No penalties for contractor oopsies in first year, but you'll still have to pay what HMRC thinks you owe
An IR35 snooper squad sniffing out contractors won't be coming to a town near you anytime soon unless there is a strong reason to suspect "criminal" behaviour.
So said British tax collection agency Her Majesty's Revenue and Customs (HMRC) as it outlined the way that the tax reforms will work and be policed when they come into effect on 6 April, a year later than originally scheduled.
Despite many attempts at further delaying or undoing the reforms, the responsibility for assessing the employment status for tax purposes of contractors that are paid via a personal service company (PSC) falls to medium and large-sized employers from that month. HMRC wants to clamp down on what it sees as freelancers dodging tax.
For the businesses that haven't yet placed blanket bans on using contractors that work via their PSC – most moved ahead of the April introduction in 2020 that was then postponed to this year due to COVID – HMRC offered advice:
We may contact you to discuss how you are applying the changes to the off-payroll working rules. This won't necessarily mean we believe you are not complying with the rules. It may be because we are aware the sector in which your organisation operates is impacted by the changes to the rules.
Simmer down, SMEs, we're just calling for a chat...
On the occasion when a medium-to-large company has the good fortune to rub shoulders with tax collectors, fear not, said HMRC – it only wants to ask for information to confirm a business is taking "reasonable care" in status determinations or if they are deemed the actual employer.
Of course, there is the Check Employment Status for Tax (CEST) tool that contractors can use to help see where they stand for tax and National Insurance purposes. HMRC said it stands by this tool, even though its own data shows that almost one in five cases were left undetermined over the space of a year.
HMRC said it realises mistakes happen with respect to tax payments and gregarious sorts within the agency will be only too happy to help correct them, perhaps with the use of a credit card, etc. Working with HMRC hand-in-hand may mitigate any penalties.
It said: "Customers will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there's evidence of deliberate non-compliance. This commitment has not changed.
"We have also committed that we 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 to 2022, unless there is reason to suspect fraud or criminal behaviour."
Seb Malley, CEO at contractor tax specialist Qdos, said HMRC continues to promote the "fundamentally flawed IR35 tool, CEST" while exploring ways to ensure compliance.
"The irony hasn't been lost on me, nor will it have been on many others," he said.
Businesses won't face a penalty for non-compliance in year one, "but if a firm makes an incorrect IR35 decision or fails to meet its legal obligations, the tax office will still demand outstanding tax owed – and tax liability dwarfs penalties." ®