IR35 news: More than half of SMBs not adhering to IR35 

BDO finds that 55% of SMBs that use contract workers are worried about IR35 reforms post-pandemic

IR35 at a glance

IR35 is a piece of legislation designed to tackle tax avoidance from 'disguised employment' where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance.

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It was first introduced in 1999 by then-chancellor Gordon Brown. However, as part of the November 2016 Autumn Statement, current chancellor Phillip Hammond said that public bodies using contractors would be responsible for IR35 enforcement from 6 April 2017.

It's thought that contractors could lose up to 25% of their money with IR35, according to ContractorCalculator, and as a result, almost 85% said they would consider leaving the public sector to work for private companies instead, according to a recent Qdos Contractor's survey.

The IR35 definitions are a little fuzzy, but if you work onsite with your client who also manages you and supplies your equipment, or if you lead a team of employees that work for the client, IR35 will most likely hit you.

This is particularly worrying for government and public bodies, as they rely heavily on IT contractors, and many of those resources would be put at risk with the IR35 rules.

Head to our What is IR35? page for a detailed breakdown of the legislation.

Latest news: More than half of SMBs not adhering to IR35 

Over half of small and medium-sized businesses (SMBs) in the UK have not put in plans to adopt changes to IR35 rules. 

That's according to a survey from financial advisory specialists BDO, which found that 55% of SMBs that use contract workers are worried about IR35 reforms when businesses return to normal as the COVID pandemic subsides.

The changes to IR35 rules, which came into effect five months ago, force companies that treat self-employed contractors as employees for the purposes of tax payments, but without having to provide standard employment rights, like statutory sick pay or redundancy. 

The businesses that haven't made the changes are now susceptible to investigations from HM Revenue and Customs (HMRC). HMRC has previously said there would be a 'soft-landing' within the first year for those who do not comply with the rule changes, but there is a taskforce launching in the coming months with the aim to clamp down on tax avoidance. 

Businesses that have no formal process in place whatsoever are likely to experience minimal leniency. The rules took effect for public sector bodies in 2017 and it has recently emerged that several government departments have had to pay large amounts of back taxes because they failed to apply the rules correctly.

HMRC has shown that it will not turn a blind eye to non-compliance, according to John Chaplin, an employment tax partner at BDO. He is urging businesses who do not have a formal IR35 process in place to immediately rethink their affairs.

"At a time when ESG is becoming increasingly important for businesses, there is an expectation for decision makers to come forward and show that good governance and tax compliance is important to them," Chaplin said. "Failing to comply with IR35 certainly shows weak governance and can prove to be an expensive mistake. Unless a business can show that it has taken 'reasonable care' over its IR35 responsibilities, penalties can rack up pretty quickly.

"With many businesses beginning to flourish again following the impact of COVID-19, now is the time to correct their tax affairs before HMRC ramps up its activity once again".

HM Courts & Tribunal Service faces £12.5 million IR35 bill

HM Courts & Tribunals Service (HMCTS) paid £12.5 million to HMRC during the last financial year after making incorrect IR35 status determinations for its contracted staff.

The detail, buried in the agency’s latest financial accounts, revealed it had fallen foul of the tax rules after wrongly determining the IR35 status of some of its contracted workers engaged between 6 April 2017 and 5 April 2020.

HMCTS, which is the arm of the Ministry of Justice that administers courts services across England and Wales, had considered these workers to be operating outside the off-payroll working rules. HMRC, however, deemed HMCTS’ determinations to be incorrect and presented the agency with a multi-million-pound tax bill.

This is the latest government body to be flagged by HMRC for failing to comply with IR35 rules. Both the Department for Work and Pensions (DWP) and the Home Office paid £87.9 million and £33.5 million in July 2021, respectively, for falling foul of the rules.

“The question ‘who next?’ springs to mind. This is the third government body to reveal that it has been stung by a multi-million pound IR35 tax liability. But given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made,” said Seb Maley, CEO of the tax consultancy firm Qdos.

HRMC’s check employment status for tax (CEST) has come under fire for being responsible for incorrect determinations, with historic data giving it a 50% success rate, although this is likely to have changed since. 

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“Here we have proof yet again that the taxman’s very own IR35 tool threatens compliance rather than ensuring it,” Maley continued. “Businesses should avoid it altogether or at the very least get a second opinion on every answer it provides.”

These departments are all liable to pay fines because the public sector has been subject to the off-payroll working rules for at least 20 years. 

IR35 was only extended to cover private sector organisations from April 2021, with businesses given a grace period for roughly a year to continue preparing before HMRC enforces fines for non-compliance. 

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