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No penalties for IR35 mistakes in year one

As a reminder, the legislation ensures that contractors who are essentially working like an employee but through a Personal Service Company (PSC) and thus paying lower tax rates are brought in line to pay broadly the same tax and National Insurance as an individual who is employed directly. Where a contractor provides their services through a PSC, from 6 April 2021 it is the responsibility of all medium and large-sized private and voluntary sector organisations, and all public sector organisations, to assess the contractor’s employment status for tax purposes.

Find out more about the changes and who they will affect in our first article – ‘Are you ready for IR35’ –  then see what practical steps you can take to prepare in ‘Get prepared: IR35 action plan’.

Support and compliance

HMRC is aiming to support those affected in getting it right as a priority, indicating that non-compliance will be approached with a ‘light touch’ in the first 12 months unless it’s suspected that violations are deliberate.

  • Penalties for inaccuracies relating to the IR35/off-payroll working rules will be waived for the first 12 months unless there is evidence of deliberate non-compliance
  • Information acquired as a result of the changes will not be used to open a new compliance enquiry into returns for tax years before 6 April 2021 to 5 April 2022, unless there is reason to suspect fraud or criminal behaviour
  • After year one, the penalty system will come into force, with scaling penalty charges up to 100% of unpaid tax for deliberate and concealed behaviour, down to 30% for ‘careless behaviour’
  • Penalties won’t be charged if reasonable care to apply the rules was taken but mistakes were still made
  • Action will be taken to deter the use of tax avoidance schemes – for example using umbrella companies offering take-home rates of pay that are ‘too good to be true through artificial schemes that claim to disguise earnings as non-taxable payments, such as loans’

HMRC has set up a specialist team to support companies and contractors through the changes, and have committed to an education programme that includes webinars and personalised discussions with the largest organisations and agencies. They have also promised to work with specific sectors to identify particular areas of difficulty.

With many businesses still dealing with the effects of Covid-19 and Brexit, the news that HMRC is to play a supportive role in ensuring compliance with these rule changes will no doubt be welcomed.

While there have been postponements to allow businesses to deal with economic challenges there is no indication that we’ll see any further delays to these rule changes, so if you work with contractors or perhaps you’re a contractor yourself, make sure you understand how the changes affect you and make any preparations necessary.

For help on this or any of the other tax changes due to take place in the coming months, get in touch with our team of specialists for advice and support.

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