Off-payroll reforms are creating a headache for organisations across the UK as they prepare for changes to come into effect in April 2020. The unpopular reforms will take responsibility for determining tax status away from the individual contractor and place it with the end client. But, while you are planning for best practice updates and allocating resources for assessment of your contract workforce, have you considered the cost of getting things wrong? HMRC have sweeping powers to investigate and penalise companies they feel have maliciously or mistakenly miscategorised contractors. This could lead to a devastating tax bill and associated penalties.
How is an HMRC investigation triggered?
HMRC have the power to investigate the tax compliance of any UK organisation, and these powers stretch to reviewing status determinations. It’s impossible to predict who will fall under their review criteria and when.
What are the penalties of a wrong determination?
If HMRC decide that you have wrongly determined a contractor to be outside IR35 when they are, in fact, operating insider IR35 – meaning you have classified them as a ‘true’ contractor when they should be determined to be an employee – they can demand back payment of PAYE taxes and NI contributions. They can also apply late-payment penalties and interest to this amount. Further to these financial punishments, they can apply a discretionary penalty of up to 100% of the amount owed. The amount of this penalty is likely to depend on whether reasonable care was taken in making the determination and the level of compliance shown. An organisation may face further legal fees if they choose to challenge the decision in court. These penalties are already impacting public sector organisations. NHS Digital recently got hit with a bill of £4.3 million pounds in back payments and penalties, despite using the government’s CEST tool.
Can a contractor dispute a determination and trigger an investigation?
A contractor is able to dispute a determination using the Client-Led Status Disagreement process. This means that you will have 45 days to investigate whether the right determination has been made and provide relevant evidence. However, there is currently no escalation procedure for this dispute process and it’s unclear whether such a dispute, or several disputes, would trigger an investigation.
IR35 reforms pose a huge financial risk to organisations, with potentially enormous penalties able to be applied by HMRC. We believe that the best way to protect your business from investigation is to seek expert advice as early as possible. We have partnered with Brookson Legal to create a complete IR35 solution that provides support against disputed determinations through legal indemnity insurance. Get in touch to find out how we can help to protect your business.