The HMRC defines the IR35 compliance principles before the new tax year
The government has set out its compliance principles for the upcoming changes to the IR35 rules in the private sector.
In this way, companies learn how HMRC supports them and how to intervene if necessary.
The changes should be made on April 6, 2020, but have been postponed until April 6, 2021 due to Covid-19.
The basic principles are listed below:
- We [HMRC] supports customers trying to do the right thing and follow the rules
- We help clients fulfill their responsibilities under the work rules for unpaid employees
- When customers make a mistake, we help them correct it
- We will check if any bugs are fixed
- We will identify and correct violations of the work rules outside of payroll
- We will purposely challenge non-compliant customers
- We will challenge tax avoidance systems that claim to circumvent work rules outside of payroll or otherwise lower the tax payable
- We will employ a team of specialists to carry out all of our compliance activities outside of payroll
The most important thing to know is that HMRC will not penalize you for mistakes made in the first 12 months unless there is evidence of willful misconduct. If there are signs of non-compliance, you might be challenged by the HMRC.
“We call people who purposely misunderstand their tax affairs” deliberate defaulters. “In certain circumstances, we may post details of deliberate defaulters to encourage them to get their tax affairs in order,” the HMRC website said.
Light Touch approach is a “red herring”
The news was not welcomed by everyone. Seb Maley, CEO of Qdos said:
“HMRC insists that there be a slight touch on IR35 compliance when reform lands on April 6, but this is a red herring. Businesses are not penalized for the first year, but if a business makes a wrong IR35 decision or fails to meet its legal obligations, the tax office will continue to charge outstanding tax debts – and tax liability dwarfs penalties.
“Big promises have been made to curb companies that deliberately abuse the rules. However, I have my doubts whether the HMRC will actually implement this and put an end to companies that place contractors in IR35. Finally, no action was taken in the public sector following the introduction of similar changes in 2017.
“With the reform completed, HMRC’s compliance policy must not prevent companies from preparing and doing everything in their power to ensure these changes are managed in a compliant manner.”
HMRC recommends that you use their Tax Employment Status (CEST) Check to verify an employee’s employment status. However, Maley disagrees with its effectiveness:
“On the face of it, it’s a good thing that HMRC wants to help companies get things right, but the tax office needs to get its own house in order first. CEST is unreliable and HMRC has a sad record in IR35 tribunals.
“On the one hand, the HMRC is looking for new ways to ensure compliance; on the other hand, it continues to promote the fundamentally flawed IR35 tool CEST, which endangers compliance. I haven’t lost the irony, and neither have many others. “
IR35 freelance tax changes will take place in April 2021 – are you ready?