Tax rules over IR35 penalties for freelance contractors

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Tax rules over IR35 penalties for freelance contractors

The tweaks proposed by the review go nowhere near far enough. If anything, this tinkering shows the government knows the changes to IR35 will be immensely disruptive to business and contractors, but plans to forge ahead regardless.

Tax rules for freelance contractors in UK

Treasury bows to pressure over IR35 and allows businesses to avoid penalties in first year. Businesses will be absolved of penalties if they incorrectly assess the status of freelance contractors in the first year of changes to UK tax rules, under a “light touch” approach outlined by the government.

The Treasury has bowed to pressure from businesses and freelance groups who have railed against the impact of changes to the IR35 rules in April when hiring companies become responsible for determining the tax status of “off-payroll” workers employed via limited companies.

In a report, it reinforced statements by chancellor Rishi Sunak, who attempted to reassure business groups that HM Revenue & Customs would not be “heavy handed” in its implementation of private sector reforms to ensure the transition was “as seamless as possible”.

Implementation of the reforms will proceed on April 6 despite strong opposition, the report said. The review also underlined that any changes to how contractors were taxed would not be applied retroactively to previous tax years unless there was suspicion of fraud or criminal activity.

However, the review was criticised for making most concessions to big companies and not addressing concerns that it will unfairly affect self-employed contractors, who will lose control of their tax determination to the companies they work with.

“It only applies to penalties, not necessarily tax liability owed as a result of inaccurate IR35 determinations,” said Seb Maley, chief executive of specialist IR35 advisory company Qdos.

The rule change affects about 230,000 contractors in the UK, and will have particular impact on sectors reliant on contractors, such as financial services and construction. All companies have to apply the rules, apart from those with fewer than 50 employees or less than £10.2m in annual turnover.

Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed, said: “The tweaks proposed by the review go nowhere near far enough. If anything, this tinkering shows the government knows the changes to IR35 will be immensely disruptive to business and contractors, but
plans to forge ahead regardless.”

The report did not address criticism of the process contractors will have to use to challenge their tax designation from employers, leaving businesses and contractors in the dark just weeks before the change is due to take hold.
The employer-led challenge process has been criticised for the burden it will place on employers, as well as the disincentivising effect it may have for contractors who do not want to lose valuable business or clients by opening a dispute.

The new reforms stipulate that a contractor will have 45 days to challenge their designation, and an employer will have 45 days to respond. HMRC said: “We believe that statutory obligation will allow contractors what they need to come to believe that statutory obligation will allow contractors what they need to come to some kind of solution with their employer.”

Advocates of the regime change criticised HMRC’s implementation of the new rules. Sophie Wingfield, director of policy at the Recruitment & Employment Confederation said: “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves.”

Advocating for a delay in the rule changes until 2021, she added: “What’s obvious from this is that the Treasury know IR35 is not quite right.” Dave Chaplin, chief executive of freelancer website ContractorCalculator, said:
“The art of taxation is supposed to be about plucking the goose with the minimum amount of squawking. You’re not supposed to kill the goose.”

The Treasury acknowledged the significant growth of self-employment and owner-managers in the UK in recent years, but said non-compliance with off-payroll tax rules was widespread and repeated the forecast that if the rules were not changed, non-compliance would cost the government £1.3bn annually by 2023. HMRC estimates that only one in 10 contractors in the private sector who should be paying tax under the current rules is doing so correctly.

HMRC also said on Thursday the government would introduce a legal obligation on organisations to respond to requested information about their size “to make it clearer who is responsible for determining the worker’s tax status”.

 

Source: FT News