HMRC says so-called 鈥榮oft landing鈥� phase now over and firms which flout regulations will be hit with big fines

Firms flouting tax rules designed to punish 鈥渄isguised鈥� employment could now face millions in financial penalties.

Yesterday (6 April) marked the end of the grace period following the introduction of IR35 reform last year, with the cost of non-compliance now set to rise considerably.

Reform of the legislation saw the responsibility for assessing contractors鈥� tax status shift from the contractor to the medium and large business engaging their services.

Liability for mistakes was also transferred to the fee-paying party, whether that is a recruitment agency or the end-client.

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Firms have been told HMRC is on the lookout for companies flouting IR35 rules

The legislation was first introduced in 2000 to wipe out tax benefits for those working in 鈥渄isguised employment鈥� 鈥� where the contractor could provide similar services within the rules of a limited company, thereby paying less tax than if they were employed by the client.

But widespread non-compliance 鈥� estimated to have cost the Exchequer 拢440m in 2016-17 鈥� prompted the government to reform the legislation in 2017.

Since then, HMRC has issued roughly 拢263m in IR35 bills across the public sector, where the changes were first introduced.

The reforms were eventually extended to the private sector last April 鈥� delayed by the coronavirus pandemic 鈥� although HMRC promised to take a 鈥渓ight touch鈥� approach to mistakes for the first year unless there was evidence of deliberate non-compliance.

The end of this so-called soft landing means private sector firms could face big penalties in the future.

When first announced, the reform provoked concern in the construction sector, which is heavily reliant on freelancers to provide technical expertise both on and off-site.

In the run-up to its introduction last year, HMRC had to put on additional guidance workshops on the changes to the tax rules, after construction companies desperate for advice booked out the initial events in under 24 hours.

The tax authority鈥檚 online Check Employment Status for Tax service, which is meant to help firms work out a contractor鈥檚 tax status, has been criticised consistently since its introduction, and as recently as February this year the National Audit Office told the government that it was still not up to scratch.

Seb Maley, chief executive of IR35 insurance provider Qdos, said it had 鈥渘ever been more important for businesses to review their existing processes鈥� with HMRC now capable of issuing 鈥渟taggering financial penalties for carelessly applying IR35鈥�.

He added: 鈥淵ou only need to look at the public sector 鈥� where one penalty alone amounted to 拢15m 鈥� for evidence of how seriously HMRC are taking compliance.鈥�

According to Maley, the number of HMRC tax investigations rose by 9% in the second half of 2021.

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