Employers will not be fined for accidental IR35 errors in first year, government confirms

HMRC says it will be lenient on firms making genuine mistakes as experts warn businesses must also be aware of compliance risks in their supply chains

Employers that accidentally fall foul of the changes to private sector IR35 rules coming into force this year will not face any fines for the first year, the government has said.

Guidance published by HMRC yesterday confirmed that the tax authority would be lenient with employers for the first 12 months of the new off-payroll rules – including in cases where the wrong tax determination is made. This is in line with the ‘light-touch approach’ promised by chancellor Rishi Sunak last year.

“We will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations,” the guidance said, adding that, unless there was evidence of deliberate non-compliance, HMRC would encourage employers to “self correct” errors before considering whether it needed to intervene further.

An HMRC spokesperson said that the guidance demonstrated its willingness to support businesses to comply with the new rules once they take effect on 6 April 2021. “This builds on our existing commitments to a supportive approach to help organisations comply with the new rules, and the comprehensive education and support HMRC is offering to help all those affected prepare,” the spokesperson 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 similar tax regardless of whether they are an employee or a contractor.

The changes to IR35 in the private sector will shift the responsibility of assessing which contractors fall into this category on to employers – as has been the case in the public sector since 2017.

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The new rules were set to come into force in April 2020, with Sunak publicly announcing this  time last year that the government would not be “heavy handed” over changes for the first year after implementation. However, Sunak took the decision to delay the rollout until April 2021 to help businesses struggling with the fallout from the coronavirus restrictions, leading to concerns that HMRC might not be so lenient in implementing the rules given the extra time businesses will have had.

However, despite the renewed promise of a ‘soft landing’ for employers, Matt Fryer, head of legal services at Brookson Legal, still cautioned businesses against cutting corners to meet the new deadline. 

“It is important to stress that HMRC will be looking to recover any underpaid tax and [national insurance contributions],” said Fryer, adding that according to conversations with HMRC he understands that non-compliance would be met with “little sympathy”. “For businesses that have tried to do the right thing but may have made a mistake along the way they will waive any interest and penalties,” he said.

Businesses also needed to be aware of compliance risk throughout their supply chain, and be able to demonstrate to HMRC that any errors made are genuinely accidental, Fryer said, noting that the 12-month delay hadn’t resulted in businesses being any more prepared for the rollout. “While the clock is ticking, it is not yet too late to manage this change adequately,” he said.

Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, praised HMRC for acknowledging how “difficult” the rule change was for employers. “Determining IR35 status is notoriously complex,” said Chamberlain. “Even HMRC gets it wrong – it’s lost more tribunals than it’s won in recent years.”

While he welcomed the 12-month leniency, Chamberlain added that it was not enough: “What is really needed – especially given the dire impact of the pandemic on the self-employed sector – is for HMRC to delay the changes to IR35 and preferably scrap them altogether.”