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.
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.
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.”