HMRC confirmed it would take a “light touch” in regards to enforcing the new IR35 rules for the initial 12 months after rollout to the private sector.
That 12 month grace period ended on 6 April 2022, and there is now an expectance that HMRC will look to enforce IR35 more stringently, which could result in some large penalties for those medium to large businesses, within the scope of IR35 rules, who still haven’t got ahead of the changes yet in regards to IR35 and status determination of their contractors.
To fall within the scope of the IR35 rules you must be classed as a medium or large business. There is an exemption from the IR35 decision-making for small businesses, as defined by s382(2) of the Companies Act 2006.
To be classed as small business, the organisation must meet at least two of the following criteria:
- Annual turnover of no more than £10.2 million.
- Balance sheet total of no more than £5.1 million.
- No more than 50 employees. (1)
Although HMRC’s statement from February 2020 said it would take a “light touch” (2) to issuing penalties to those firms making mistakes when trying to comply with the off-payroll working rules, it added, its “light touch” would not be applied to those where there was evidence of deliberately non-compliance.
Some examples of how large the penalties could be can be seen in the fines issued in the public sector.
The Department for Work & Pensions (DWP) was fined £87.9 million, while the Home Office was hit with a £33.5 million penalty, both in the summer of 2021. It later emerged HM Courts & Tribunal Service was handed a £12.5 million tax bill for not adhering to IR35 rules.
IR35 12 months on
Even though the off-payroll legislation has had a year to bed-in it still courts controversy, especially in 2022 on the back of the alarming rising living costs and the recent rise in the National Insurance rate.
An inside IR35 status determination for a contractor can have a significant impact on their income and means the contractor must pay the same tax and National Insurance as permanent employees, but they will not receive the same benefits such as employer pension contributions and paid holiday.
Whereas an outside IR35 determination means the contractor can pay themselves a small taxable salary and make-up their income through non-taxable dividends.
Caunce O’Hara undertook a contractor IR35 survey, throughout February and March 2022, to discover what contractors think and find out exactly how the first 12 months of IR35 has affected them.
Some of the feedback was quite alarming and highlighted the drop in work opportunities and drop in income that many contractors had experienced (3). Click here to read the results of the survey.
Sources:
- New IR35 Rules explained https://www.caunceohara.co.uk/ir35/information/new-ir35-rules-explained/
- https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/867280/20200219_Off-payroll_HMRC_compliance_strategy.pdf
- https://www.caunceohara.co.uk/ir35/guides/ir35-one-year-on-60-of-contractors-report-drop-in-income/
https://www.caunceohara.co.uk/ir35/guides/fee-payers-ir35-guide/
https://www.caunceohara.co.uk/ir35/news/dwp-hit-with-huge-tax-bill-for-historic-ir35-contractor-status-assessment-errors/
https://www.caunceohara.co.uk/ir35/news/home-office-hit-with-huge-ir35-tax-bill/
https://www.computerweekly.com/news/252515619/IR35-reforms-Private-sector-warned-HMRCs-12-month-light-touch-enforcement-period-is-ending
