While off-payroll working rules (IR35) for the private sector have been in place since April 2021 HMRC has been relatively relaxed when it comes to penalising those who make mistakes - until now.
Could HMRC's previously relaxed stance on penalties be do to the complicated nature of knowing whether someone is considered inside or outside IR35?
Regardless of their reason, the initial 12 month grace period is over and from 6 April 2022 HMRC began charging penalties for any inaccuracies relating to the application of the off-payroll working rules.
What is off-payroll working?
Off-payroll working refers to a situation where individuals provide a service to a company without being an employee. This type of work arrangement is most often associated with contractors or similar service providers and must follow HMRC’s off-payroll policies known as IR35 rules.
Why are off-payroll rules enforced?
To ensure individuals working like employees through their own Personal Service Company (PSC) pay roughly the same Income Tax and National Insurance contributions (NICs) as directly employed individuals, the UK government introduced IR35 rules to address off-payroll working arrangements and put a halt to any tax avoidance attempts.
When do off-payroll rules (IR35) apply?
Determining when or if IR35 rules apply can be a complex process and must be determined on an individual basis. It also depends on the size of the company bringing a contractor on board.
In a general sense, if the individual providing the service would be ‘classed as an employee if they were contracted directly’, then the rules apply.
Medium and large-sized private sector companies are responsible for determining the employment status for any contractors they use, where small private sector companies are not subject to the new off-payroll working rules and it remains the responsibility of the contractor to determine their employment status.
How is company size determined?
The size of a company is determined by annual turnover, balance sheet total and the average number of employees.
To classify as small, medium or large the company will match 2 of 3 criteria for a given size category:
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Size classification is based on the Companies Act definition and should be checked each year, especially where a company is in a phase of growth.
How to determine employment status?
When deciding the status of employment, the client should review:
- Contract details
- The responsibilities of the worker
- Who decides what work needs to be done
- Who decides when, where and how the work is done
- How the worker will be paid
- If the engagement includes any corporate benefits or reimbursement for expenses
Employment status depends on the contract terms and conditions and working practices, therefore you can not simply assume that someone is employed or self-employed for tax purposes.
What is the penalty for off-payroll working non-compliance?
Where companies incorrectly apply the IR35 rules, late payment fines and additional interest may be charged. HMRC can also charge fines up to 100% of the outstanding tax owed.
How to remain IR35 compliant:
The only way to avoid penalties is to ensure you are remaining IR35 compliant:
- Make sure your HR team (or other relevant department) has a sound understanding of IR35 and a thorough knowledge of the rules and responsibilities.
- Review all of your employee contracts and determine their status of employment based on HMRC’s guidelines. You’ll also need to submit a Status Determination Statement (SDS)
- Keep records to show how you concluded the status of your employees, you may need these if HMRC investigates or there is a dispute.
- Review all contracts on a regular and consistent basis, don’t forget to keep copies!
There would be no problem complying with the rules if there was a clear definition of employment as opposed to self-employment. Unfortunately, HMRC’s Check Employment Status for Tax (CEST) tool falls short of what is required, and even government departments have found themselves liable for millions in additional tax after erroneously relying on the CEST tool.
It may be worth bringing a professional advisor in to review and confirm if your contracts fall within the IR35 rules.
How can DSA help?
IR35 legislation is intricate and the companies, as well as the contractors involved can often find themselves in a difficult and potentially risky situation if they have managed the off-payroll working rules inappropriately.
Our professional team will use their expertise to work alongside you and your organisation to help mitigate these risks. Please contact our team today to discover how we can help.
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