HMRC to close moratorium on IR35 off-payroll error penalties in April 2022

The rules were imposed on public sector organisations in 2017 and extended to private sector companies and charities from 6 April 2021. They now place the responsibility on hirers to determine the tax and employment status of UK-resident contractors whose services they pay for through a personal service company. The policy is intended to prevent contractors evading the pay-as-you-earn income tax and national insurance contribution system.

When the legislation was brought into force in 2021, HMRC undertook a light-touch approach to enforcement and imposed penalties during the first year only if there was evidence of deliberate non-compliance. It also improved its check employment status for tax (CEST) online tool to help hirers conduct their status determinations.

However, experts have expressed doubts as to whether employers are ready for greater scrutiny of their payments to contractors, now that the penalties amnesty is coming to an end. HMRC has acknowledged in written evidence to the House of Lords Economic Affairs Committee Finance Bill Sub-Committee that the one-off administrative burden for businesses will be higher than the GBP14.4 million it originally forecast, revising the figure to GBP19.7 million. HMRC’s own research has also confirm that nearly half of employers surveyed found the IR35 reforms difficult to comply with when initially introduced in the public sector.

The House of Lords committee's response to this evidence recognised the limitations of CEST and the challenges and burden of costs that businesses and workers face because of the new rules.

A recent National Audit Office IR35 report noted that complex supply chains are more common in the private sector, when compared to the public sector, creating a greater risk of companies making errors when determining tax status.

'The administrative burden of compliance on business should not be underestimated', comments law firm Mishcon de Reya. It notes that HMRC estimates the IR35 reforms could bring in an extra GBP1.3 billion a year by 2023/24, so IR35 compliance will be one of its areas of growing interest from April 2022, when financial penalties may be issued. 'The earlier arrangements are reviewed, and conversations start, the better to both minimise costs and reduce the risk of HMRC scrutiny', it says.

Even if the hirer is not responsible directly for paying the worker's fees, they could still potentially acquire liability for tax if the person responsible defaults on their liabilities, says law firm Eversheds Sutherland. Firms should refresh their understanding of IR35 principles, such as by using HMRC website information, which will help them show they have exercised reasonable care over the rules, and should ensure that their IR35 administration is compliant, says Eversheds Sutherland.

Sources

• Mishcon de Reya
• Eversheds Sutherland
• HMRC
• House of Lords committee (report, PDF)
• House of Lords committee (response)
• STEP UK News 14 February 2022: UK contractors moved onto public sector payrolls may now be due tax refunds