HRMC briefing on how to avoid IR35 penalties

On 15 February 2021 HMRC published its policy paper explaining how it intends to help and support organisations which must comply with changes to the off-payroll working rules (IR35) and avoid IR35 penalties. The IR35 rules will apply to all medium and large sized businesses in the private sector with a UK connection from 6 April 2021.  The policy paper sets out HMRC’s compliance principles and when HMRC is likely to investigate suspected tax avoidance. It contains examples and helpful links to further HMRC guidance.

HMRC clearly recognises the complexities faced by organisations now having to prepare for  IR35 rules.  It promises to help “customers trying to do the right thing” and work with those who make genuine mistakes about the employment status of the individuals they contract with through personal service companies. HMRC has reiterated its pledge that in the first 12 months it will not impose any penalties for inaccurate status determination statements, providing  that ‘all reasonable care’ has been taken.  This penalties exemption will not apply where there is deliberate non-compliance or fraud.

While this supportive compliance regime is to be welcomed businesses should not be complacent. Genuine mistakes will not be penalised but they may not be forgotten either. If HMRC identifies mistakes in the way a business has applied the off-payroll working rules HMRC will expect it to ‘self-correct’. And HMRC may do follow-up checks by reviewing available data such PAYE Real Time Information (RTI).

If a business agrees to correct a mistake by changing a contractor’s status determination, HMRC may check that tax and NICs have been accounted for. If a business agrees to update the client-led status disagreement processes, HMRC may contact them to check that the new process meets the requirements of the legislation.

HMRC says that it will (as opposed to may) follow up business to confirm they become compliant and pay taxes that are due if they identify that the business:

• Didn’t take the opportunity to correct mistakes
• Are continuing to make mistakes
• Are making new mistakes