Accidental IR35 breaches will not be penalised in first year, says government

Review into changes to private sector off-payroll rules confirms ‘light touch’ approach, but experts say there is ‘little new’ in the report

Businesses will not have to pay penalties for accidentally falling foul of IR35 off-payroll rule changes in the first year of them coming into effect, the government has said.

HMRC has today published the findings of its review of IR35 in the private sector, pledging to take a “light touch approach to penalties” in the first year of the reform.

The review has said employers using contractors “will not have to pay penalties for errors relating to off-payroll in the first year, except in cases of deliberate non-compliance,” putting in writing promises made by Rishi Sunak, chancellor of the exchequer, earlier this week that the government would not be “heavy handed”.

The review has also stated HMRC would not open any new investigations into personal service companies for tax years before 6 April 2020, when the changes come into effect. The government has previously said the new rules will only apply to payments for contracts carried out after the rules come into effect.

However, the review reiterated there would be no delay to the 6 April roll-out of the changes.

It also introduced a new obligation on businesses to respond to requests about their company size from agencies or workers. The aim is to make it easier for agencies to determine whether the new rules apply to their clients.

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Brian Palmer, tax policy adviser at AAT, said it was unrealistic to expect a delay to the changes, but that he was pleased the government had instead confirmed there will be a “soft-landing period”.

“All in all, the package announced today might not be everything that everyone wanted but it’s certainly a step in the right direction,” he said.

Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid the same tax regardless of whether an employee or contractor.

The changes to IR35 in the private sector will shift the responsibility of assessing which contractors fall into this category to employers. The changes have applied to public sector employers since 2017.

The government announced its review in January in an attempt to address concerns from both businesses and the self employed around not enough support being given to ensure a smooth implementation, and around the government’s status-checking tool – check employment status for tax (CEST) – which has undergone multiple iterations and attracted criticism for its reliability. Recruitment and freelancer bodies have called for implementation of the changes to be delayed until 2021. 

Susan Ball, employer solutions partner at RSM, said there was “little new” in this review, and organisations hoping for wholesale changes to the legislation would be disappointed. But, she said: “Organisations and individuals who have done the necessary prep work prior to the rules coming into force in April will be relieved that the goal posts haven’t moved.”

Ball added that while it might be “unhelpful” to have new obligations added at this late stage, the rules around disclosing company size “might be useful to help every party understand their position”.

However, Sophie Wingfield, director of policy at the Recruitment and Employment Confederation, argued the government’s ‘light touch’ approach in the first year would create more problems than it solved. “The consequences of not complying with tax law should be [made] clear. Not doing so could create an unlevel playing field where compliant employers lose out to unethical ones,” she said.

Wingfield called for more details around how this light-touch approach would work in practice. “What’s obvious from this is that the Treasury knows IR35 is not quite right,” she said. “Rather than tinkering around the edges of this complex legislation, we need the government to delay implementation until 2021 to make sure it’s done properly.”

Samantha Hurley, director of operations at APSCo, which represents recruiters, said it’s members would “welcome the extra time to adjust” this ‘light touch’ arrangement offered. “HMRC has long maintained that it genuinely wants businesses to comply with the new rules and that there will be no witch hunt – and this latest move suggests this may truly be the case,” she said.