HMRC is penalising off-payroll mistakes: What you need to know about IR35 rules

What you need to know about IR35 rules and penalties - DSA Prospect

While off-payroll working rules (IR35) for the private sector have been in place since April 2021 HMRC has been relatively relaxed when it comes to penalising those who make mistakes - until now. 

Could HMRC's previously relaxed stance on penalties be do to the complicated nature of knowing whether someone is considered inside or outside IR35?

Regardless of their reason, the initial 12 month grace period is over and from 6 April 2022 HMRC began charging penalties for any inaccuracies relating to the application of the off-payroll working rules.

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Why are off-payroll rules enforced?

To ensure individuals working like employees through their own Personal Service Company (PSC) pay roughly the same Income Tax and National Insurance contributions (NICs) as directly employed individuals, the UK government introduced IR35 rules to address off-payroll working arrangements and put a halt to any tax avoidance attempts.

When do off-payroll rules (IR35) apply?

Medium and large-sized private sector companies are responsible for determining the employment status for any contractors they use, where small private sector companies are not subject to the new off-payroll working rules and it remains the responsibility of the contractor to determine their employment status.

How is company size determined?

The size of a company is determined by annual turnover, balance sheet total and the average number of employees.

To classify as small, medium or large the company will match 2 of 3 criteria for a given size category:

Small Company Medium Company Large Company
  • Annual Turnover less than £6.5m
  • Annual Turnover less than £25.9m
  • Annual Turnover greater than £25.9m
  • Balance Sheet Total of less than £3.26m
  • Balance Sheet Total of less than £12.9m
  • Balance Sheet Total of less than £12.9m
  • Average number of employees less than 50
  • Average number of employees less than 250
  • Average number of employees more than 250

Size classification is based on the Companies Act definition and should be checked each year, especially where a company is in a phase of growth.

How to determine employment status?

When deciding the status of employment, the client should review:

  • Contract details
  • The responsibilities of the worker
  • Who decides what work needs to be done
  • Who decides when, where and how the work is done
  • How the worker will be paid
  • If the engagement includes any corporate benefits or reimbursement for expenses

Employment status depends on the contract terms and conditions and working practices, therefore you can not simply assume that someone is employed or self-employed for tax purposes.

What is the penalty for off-payroll working non-compliance?

Where companies incorrectly apply the IR35 rules, late payment fines and additional interest may be charged. HMRC can also charge fines up to 100% of the outstanding tax owed.

How to remain IR35 compliant:

There would be no problem complying with the rules if there was a clear definition of employment as opposed to self-employment. Unfortunately, HMRC’s Check Employment Status for Tax (CEST) tool falls short of what is required, and even government departments have found themselves liable for millions in additional tax after erroneously relying on the CEST tool.

It may be worth bringing a professional advisor in to review and confirm if your contracts fall within the IR35 rules.

How can DSA help?

IR35 legislation is intricate and the companies, as well as the contractors involved can often find themselves in a difficult and potentially risky situation if they have managed the off-payroll working rules inappropriately.

Our professional team will use their expertise to work alongside you and your organisation to help mitigate these risks. Please contact our team today to discover how we can help.

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Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.

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