HMRC clarifies off-payroll working compliance rules

HMRC has published an issue briefing on its compliance approach for the changes to off-payroll working rules, commonly known as IR35, from 6 April 2021

From the start of the new tax year, organisations engaging contractors who work through their own limited company - personal service company (PSC) or other intermediary will be responsible for determining if they are employed or self-employed for tax purposes.

As part of its commitment to transparency, HMRC has outlined a principled approach to ensure compliance with the change to the off-payroll working rules from 6 April 2021.

Organisations that need to comply with the rules include:

  • public sector authorities which engage contractors who work through their own limited company or other intermediary;
  • medium and large-sized private sector organisations which engage contractors who work through their own limited company or other intermediary; and
  • employment agencies and third parties which supply contractors.

If the rules apply, the client organisation, or the agency or third party paying the contractor’s PSC, is then responsible for accounting for employment taxes and national insurance contributions (NICs).

Affected businesses will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.

Under the new off-payroll working rules extension, responsibilities depend on whether the organisation operates as a client organisation, an agency or a deemed employer. These responsibilities may include:

  • making accurate employment status determinations (referred to as Status Determination Statements or SDS in legislation) that reflect the actual working practices of the contractor, and taking reasonable care in coming to those decisions;
  • developing and maintaining client-led status disagreement processes which are required to allow client organisations to deal with concerns raised by workers and deemed employers on the SDS received, including dealing with representations appropriately within time limits;
  • passing information to relevant parties in the labour supply chain, including having processes in place so that information is passed on at the right time before payment is made; and
  • operating PAYE correctly, including the calculations of chain payments and deemed direct payments so the correct tax and NICs are deducted.

The briefing provides an overview and a selection of case studies, setting out what taxpayers can expect from the tax authority.

  • reaffirms HMRC’s commitments to a supportive approach to help organisations comply with the new rules. This includes applying a light touch approach to penalties in year one and not using information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.
  • confirms that the scope of our compliance activity is not solely related to the application of the off-payroll working rules, but includes all arrangements that result in less tax being paid than should be the case, such as tax avoidance schemes that claim to avoid the rules.
  • explains we will use a specialist team for off-payroll working compliance activity ensure customers receive high-quality support and non-compliance is challenged effectively and efficiently.

HMRC has worked with trade and representative bodies for those affected by the changes to develop the briefing to ensure it works for taxpayers and the tax authority. It is also providing a substantial programme of support and education to help taxpayers get ready for the changes. This includes a range of webinars people, along with updated guidance and additional support for contractors.

An HMRC spokesperson said: ‘The publication explains how we will continue to support organisations to comply with the off-payroll working rules, once they take effect on 6 April 2021. It also shows what HMRC will do to identify and step in where organisations deliberately try to avoid paying what is due under rules.

‘This builds on our existing commitments to a supportive approach to help organisations comply with the new rules, and the comprehensive education and support HMRC are offering to help all those affected prepare.’

After year one, the penalty system will come into force with penalties with scaling charges up to 100% of unpaid tax for deliberate and concealed behaviour, down to 30% for careless behaviour.

HMRC confirmed that it would ‘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’.

To deter use of contrived tax avoidance schemes, HMRC said ‘we will take action if contractors are engaged through artificial, contrived arrangements which are claimed to avoid the application of the off-payroll working rules or result in customers paying less tax than should be the case’.

This could include umbrella companies offering take home rates of pay that are ‘too good to be true through artificial schemes that claim to disguise earnings as non-taxable payments, such as loans’.

HMRC issue briefing: supporting organisations to comply with changes to the off-payroll working rules (IR35)

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