How to avoid IR35 penalties

02/18/21 • 3 min

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). 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

Deborah Scales, employment solicitor explains the guidance.

Deborah Scales, employment solicitor explains the guidance.

Previous Episode

16 things to know for IR35 tax rules this April

Major changes are happening this April as businesses become responsible for deciding the employment status of the contractors they engage through an agency or the contractor’s own limited company, known as a Personal Service Company or PSC.

Businesses will assume PAYE liability on the payments it makes for the contractor’s services – if it decides the contractor is really a ‘disguised employee’ rather than a genuinely independent contractor. These businesses will be known as the ‘fee-payer’.

These changes - known as the Off-Payroll Working Rules and sometimes called IR35 - will affect all medium to large private sector companies with a UK connection from 6 April 2021. (IR35 has been in force in the public sector 2017). Many businesses have underestimated how much preparation is needed to be ready for these new rules.

Deborah Scales Employment Solicitor explains how to comply.

Next Episode

Tax implications of working from home

HMRC guidance sets out that if an employee is working from home due to COVID-19, a homeworking arrangement will exist for this period.
Employees working from home regularly therefore may be able to benefit from certain tax exemptions, although this cannot be where they are working informally. HMRC guidance has confirmed that if an employee is working from home due to COVID-19, the definition of a homeworking arrangement for tax purposes, will be met for this period.
Senior Solicitor Georgia Roberts discusses how employees working from home regularly may be able to benefit from certain tax exemptions.
For specific advice on contractual place of work, please get in touch with our employment lawyers.