Government to waive IR35 penalties in first year

The Government will waive penalties for IR35 non-compliance for the first 12 months, it has been revealed.

The new off-payroll working rules – which will see some contractors taxed as if they were employees – are due to come into force on 06 April 2021.

The announcement comes after the publication of a new HM Revenue & Customs (HMRC) issue briefing, outlining how organisations will be supported in implementing the new regime.

If you’re unsure how IR35 will work, here’s a quick summary:

The new off-payroll working rules will ensure that an individual who works like an employee, but through their own limited company (such as a personal service company) or other intermediary, pays broadly the same Income Tax and National Insurance contributions (NICs) as other employees.

Crucially, the new legislation will hold medium and large employers to account for determining a contactor’s employment status. As the responsibility of determining employment has passed to the employer, as has the liability for any underpaid tax – meaning businesses should adopt a diligent approach to assessing the tax status of contractors.

However, HMRC has confirmed that it will take a light-touch approach to penalties in the first year, providing the employer can prove that they are taking reasonable care in making status determinations.

Commenting on penalties, the regulator said: “If you realise you have made a mistake in applying the off-payroll working rules, you should tell us about it at the earliest opportunity. We can work with you to put it right, whether that means paying unpaid tax or refunding overpaid tax.

“Where additional tax is payable as a result of a mistake, penalties may be due. However, if you tell us early and work with us to correct the mistake it can help mitigate any penalties.”

It added: “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.”

For help and advice complying with the new off-payroll working rules, please get in touch with our expert team.

Posted in Covid-19 - IR35, Payroll.