The off-payroll working rules, commonly known as IR35, are designed to ensure that individuals who provide their services via an intermediary but who work in a similar way to employees, such as some contractors, consultants and freelancers, pay broadly the same income tax and national insurance contributions as employees. Government concerns over non-compliance with the IR35 Rules resulted in a reformed IR35 regime for the public sector in 2017 and for the private sector in April 2021.
HMRC stated that it would initially take a lenient approach to enforcement during the first year of implementation in the private sector, including a moratorium on penalties until April 2022, provided there was no deliberate or dishonest conduct. However, this is set to end and may take some organisations by surprise.
Making wrong decisions about IR35 can be significant. In addition to a liability to pay employment taxes, IR35 penalties can reach 70% of the additional tax due if an error is considered to be deliberate and even careless errors can attract a 30% penalty. Once default is identified by HMRC, it is also likely in due course that employers will be “named and shamed” in a regular online report.
Taking reasonable care
HMRC’s own research shows that employers have found the IR35 reforms difficult to implement and this is our experience in practice.
As a reminder, in broad terms IR35 applies when:
- a worker personally performs services for a client
- the client is either a public authority or a medium or large private sector entity with a UK connection
- the services are provided through a certain kind of intermediary (e.g. a limited company controlled by the worker)
In summary, when IR35 applies, the client must:
- decide the employment status of the worker, exercising reasonable care in reaching this decision
- provide its decision on status, with reasons, via a status determination statement to the worker and to the party it contracts with for the supply of the worker
- have in place a status disagreement process (a dispute resolution process)
- if they are the fee payer, deduct and pay employment taxes to HMRC
Non-compliance, for example, failing to exercise reasonable care over the status determination or to communicate the results, will result in the worker’s income tax and national insurance contributions becoming the client’s responsibility. HMRC has reported that failures to exercise reasonable care have resulted in significant enforcement action to date (in the public sector, reflecting the earlier 2017 implementation of the IR35 reforms).
It’s not too late to act
With the end of the HMRC moratorium approaching, organisations should review whether their processes for hiring contract and freelance labour are IR35 compliant, or risk HMRC investigation and, potentially, significant tax liabilities and penalties.
As a minimum, a review should ensure that reasonable care has been taken in status determinations and that IR35 processes are compliant. Where labour supply chains exist, the integrity of those within the supply chain should be checked, as well as contractual liabilities and indemnities.