April 2022 marked the end of the one-year grace period to the ‘off-payroll working rules’ that were included within the IR35 legislation change. The soft-landing period was to allow contractors and firms to prepare for the incoming reform and ensure their compliance.
The initial changes to the IR35 legislation were implemented in 2021 after being postponed during the COVID pandemic. The changes were brought in with the aim of combatting tax avoidance through “disguised employment”. This is where workers behave as regular employees but avoid contributions to National Insurance and avoid Income Tax by billing for their services through personal service companies (PSCs), which are taxed at lower rates.
What are the changes to IR35 legislation?
The IR35 changes involve:
· Assessing the contractor’s IR35 status for each engagement, rather than the supplier of services.
· The fee-payer (i.e., the party in the supply chain closest to the contractor’s limited company, for example, the recruitment agency or the client themselves) will be responsible for calculating, reporting and processing tax via PAYE on payments made to contractors deemed ‘employed for tax purposes’.
· The fee-payer will now also be liable for employer’s National Insurance Contributions (13.8%) and the Apprenticeship Levy (0.5%) on top of the fees paid to the contractor, as well as assuming tax liability risk if HMRC challenges a deemed status.
· If it is proven that the client hasn’t taken ‘reasonable care’ in assessing a contractor’s IR35 status, the client automatically assumes the position of fee-payer.
Contractors found within the legislation scope (i.e. inside IR35) will be required to pay more tax than they might expect, and failure to adhere to the new stipulations could mean severe repercussions for businesses who ignore, misinterpret or are unaware of the changes. HMRC predicts that the reform will recoup £1.2bn a year by 2023.
The latest update has been met with a fair amount of skepticism, and a recent survey shows that 61% of contractors highlighted the reform as the “biggest threat” to their business. The impact of the IR35 legislation is certainly one to monitor now that the soft-landing period has ended. There is little clarity on how businesses will cope over the coming months as costs have been raised at all levels of supply chains, not to mention the possibility of fines if not compliant with IR35.
What are the IR35 penalties?
- A penalty of 30% of unpaid tax if HMRC deems that you were careless about your employment status but did not know it was inaccurate
- A penalty of 70% of unpaid tax if HMRC finds that you knew you were within IR35 and yet chose not to act
- 100% of unpaid tax if HMRC finds that you have actively tried to conceal your IR35 status and underpayment of tax
A full breakdown of the official Government guidance in IR35 compliance can be found here.
Our team are ready to answer any questions on the changes to the IR35 legislation, and can offer our payroll service to those who need it, ensuring you are compliant. For more information or guidance, get in touch by calling 01792 346272 or contact us here.