HMRC have published further guidance regarding planned IR35 compliance activity, reiterating that businesses who make mistakes will not be handed penalties in the first 12 months unless there is evidence of intentional non-compliance.
The guidance read: “We will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations.”
However, the taxman said it will encourage employers to “self-correct” any errors before it considers intervening.
From 6 April, reforms to the off-payroll legislation come into effect in the private sector, after being delayed by one year because of the Coronavirus pandemic.
Changes to the IR35 rules will see medium to large-sized businesses become responsible for determining the IR35 status of contractors they engage.
HMRC said the briefing document explains how the authority will help businesses comply with the reform and “identify and step in where organisations deliberately try to avoid paying what is due.”
They added: “This builds on our existing commitments to a supportive approach to help organisations comply with the new rules, and the comprehensive education and support HMRC are offering to help all those affected prepare.”
While the grace period – which was announced previously – has been largely welcomed, IR35 specialists are warning businesses not to become complacent and to ensure their compliance given the cost of wrongful decisions remain high.
Seb Maley, Qdos CEO, has dubbed HMRC’s “light touch” to IR35 compliance as a “red herring”. He said that while businesses will not face any penalties in the first year, if it makes an incorrect status decision or fails to meet its legal obligations, the taxman will still demand any owed tax and “tax liability dwarfs penalties.”
He then explained: “Big promises have been made to clamp down on businesses that deliberately abuse the rules. But I have my doubts as to whether HMRC will actually deliver on these, and put a stop to firms that blanket place contractors inside IR35. After all, no action was taken in the public sector following the roll out of similar changes in 2017.”
Maley’s comments are echoed by Joanne Harris, Technical Commercial Manager at Parasol. She told Contractor Weekly that the first 12 months “should absolutely not be seen as a free pass for companies […] to forgo the requirement for reasonable care placed upon them by the legislation.”
Harris added: “HMRC have also reiterated a commitment not to use information acquired as a result of the changes to open a new compliance enquiry into early years unless they suspect fraud or criminal behaviour.
“While this may offer some reassurance, it doesn’t guarantee that HMRC won’t open investigations and the commitment doesn’t prevent HMRC from using a change in status in an investigation, as long as it isn’t the initial trigger. Therefore, it’s essential to have all assignments assessed.”
Maley also warned organisations against relying on the authority’s Check Employment Status of Tax (CEST) tool. He said: “On the face of it, that HMRC wants to help businesses get things right is a good thing, but the tax office needs to get its own house in order first. CEST is unreliable and HMRC have a dismal record in IR35 tribunals.
“With reform closing in, HMRC’s IR35 compliance principles mustn’t distract businesses from preparing and doing everything in their power to make sure these changes are managed in a compliant manner.”