Businesses have a 12-month grace period to flub IR35, says HMRC

The new IR35 rules, which come into effect in April, are meant to close loopholes that are open to abuse

The UK's tax collection agency HM Revenue and Customs (HMRC) has published a document outlining compliance principles for the upcoming changes to off-payroll working rules (IR35) in the private sector.

The current IR35 rules have been in place for the past 20 years. They rules were designed to ensure that 'an individual who works like an employee, but through their own limited company (usually a personal service company 'PSC') or other intermediary, pays broadly the same Income Tax and National Insurance contributions (NICs) as other employees'. The rules do not apply to self-employed individuals.

New IR35 rules were due to come into effect on 6th April 2020, but were delayed until 6th April 2021 in response to the economic uncertainty caused by the coronavirus pandemic.

In July last year, a late-stage amendment to the Finance Bill 2019-2021 asked MPs to support a further delay to the 2023-24 tax year, allowing the Treasury to complete a thorough impact assessment. However, the amendment did not win sufficient support.

HMRC says that after 6^th April, it will be the responsibility of medium and large-sized private and public sector organisations to assess the employment status of contractors that are paid via a PSC for tax purposes. In other words, organisations will decide whether the contractors they use should be taxed as off-payroll workers or permanent employees.

Under current rules, contractors are allowed to self-declare their tax liabilities. That system is open to abuse, HMRC believes, because contractors can intentionally mis-classify their working arrangements with their employers as being outside IR35 rules, to curtail their tax liabilities.

The UK tax collector says it wishes to support customers who want to do the right thing and comply with the IR35 rules.

HMRC will not punish employers for IR35 mistakes made in the first 12 months, unless there is an indication of intentional non-compliance.

'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,' the guidance said.

HMRC will encourage employers to 'self correct' errors before deciding whether it needs to intervene further.

Small non-public sector organisations will not be affected by the upcoming changes, HMRC said.

'Workers and agencies may ask small non-public sector organisations they contract with, to confirm that their organisation qualifies as 'small',' it added.