Employers will not be fined for accidental IR35 errors in first year

HMRC says it will be lenient on firms making genuine mistakes as experts warn businesses must also be aware of compliance risks in their supply chains.

Employers that accidentally fall foul of the changes to private sector IR35 rules coming into force this year will not face any fines for the first year, the government has confirmed. 

The recent Guidance published by HMRC confirmed that the tax authority would be lenient with employers for the first 12 months of the new off-payroll rules – including in cases where the wrong tax determination is made. This is in line with the ‘light-touch approach’ promised by chancellor Rishi Sunak last year.

There will not be a charge penalty if an employer takes reasonable care to apply the off-payroll working rules correctly but still make a mistake, including making mistakes in status determinations, the guidance states, adding that, unless there was evidence of deliberate non-compliance, HMRC would encourage employers to “self-correct” errors before considering whether it needed to intervene further.

Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid similar tax regardless of whether they are an employee or a contractor.

The changes to IR35 in the private sector will shift the responsibility of assessing which contractors fall into this category on to employers – as has been the case in the public sector since 2017.