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Most businesses yet to adhere to new IR35 rules

More than half of medium-sized businesses have not yet formalised processes to be IR35 compliant

Around 55 per cent of medium-sized businesses that engage contractors are yet to fully adhere to new IR35 rules, a survey by accounting firm BDO has revealed.

According to the poll of 500 businesses, respondents claimed they would deal with the IR35 reforms once the pandemic subsides.

IR35 reform in the private sector came into effect in April this year. Under these rules, medium and large businesses are now responsible for determining the IR35 status of contractors they engage. 

So-called small companies are exempt, with the rules applying to businesses with more than 50 employees, an annual turnover of more than £10.2 million or a balance sheet total above £5.1 million.

HMRC has shown it will ‘not turn a blind eye’

If a contractor is placed inside IR35, they will have income tax and national insurance contributions deducted at source, similar to employees. Following IR35 reform, this has become the responsibility of the fee-paying parties, which now carry the IR35 liability. 

John Chaplin, employment tax partner at BDO, said: “Businesses who do not comply will still need to pay tax and could face significant penalties. 

“HMRC has shown that it will not turn a blind eye to non-compliance, so businesses who do not have a formal IR35 process in place should immediately rethink their affairs.”

Although HMRC has said it will give employers a ‘soft landing’ –  a grace period – for the first 12 months, from Autumn, a new task force is set to emerge to clamp down on unpaid tax. 

Businesses with no process in place to manage IR35 reform are likely to experience little leniency from HMRC.

Failing to comply could be an ‘expensive mistake’

Chaplin’s warning comes after numerous government departments have been investigated for non-compliance in the public sector – where similar reforms to IR35 came into effect in April 2017.

HM Courts and Tribunals was recently hit with a £12.5 million IR35 bill, as was the Department for Work and Pensions, who had to pay £87.9 million to HMRC for “historic” mistakes when determining IR35 status.

It emerged that the Home Office was also handed a £33.5 million bill, which included a £4 million penalty for “careless” implementation of the IR35 rules.

Chaplin added: “At a time when ESG is becoming increasingly important for businesses, there is an expectation for decision-makers to come forward and show that good governance and tax compliance is important to them.

“Failing to comply with IR35 certainly shows weak governance and can prove to be an expensive mistake. Unless a business can show that it has taken ‘reasonable care’ over its IR35 responsibilities, penalties can rack up pretty quickly.”

By Contractor Weekly

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5 thoughts on “Most businesses yet to adhere to new IR35 rules”

  1. J Allinson

    The whole implementation across the board of companies is a farce. Most big companies I have contracted with have put all their temporary workforce under IR35 regardless of the duration or position of said contractor. And it is very much a take it or leave it if questioned. The whole situation is killing the market so that ‘the big four’ can charge a company often four times as much and deliver five times less. Be interesting to see how many MPs have connections to those companies.

  2. R

    It will be interesting to see how Infosys’s UK based sales and turnover figures have grown since IR35 crippled the UK IT contracting market, and whether their UK tax paid increased at a proportional rate.

    ….. Not that there’s any connection at all between the largest global IT consultancy in India, and the UK government. Obviously.

  3. Bobby

    Most businesses don’t have the bandwidth to deal with a contradictory set of IR35 rules with unknowable consequences. Add to that a pandemic and huge Brexit upheavals and the response has been to either ban small contractors or don’t address the problem yet through procrastination.
    The UK economy is tanking and no one is dodging the smaller icebergs while there’s titanic problems shutting down multiple industries.

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