The Treasury has promised a "light touch approach" to IR35 penalties in the coming year as it pushes forward with its reform in a move branded "disappointing albeit unsurprising".
In its promised review of the IR35 rules published today (February 27) the government admitted the incoming changes were a "major change" for the industry.
But it argued the reforms were necessary to address the "fundamental unfairness" surrounding non-compliance with the current rules, which it warned would soon deprive the taxpayer's pot of billions.
Introduced in 2000 IR35 is an anti tax avoidance rule which applies to all contractors and freelancers who do not fall under HMRC’s definition of being self-employed.
As of April 2020 every medium and large private sector business in the UK will become responsible for setting the tax status – or IR35 – of any contract worker they use, as has been the case in the public sector since 2017.
In today's review the Treasury doubled down on its promise not to penalise inaccuracies relating to the off-payroll working rules in the first 12 months of the changes, other than in cases of deliberate no-compliance.
HM Revenue and Customs also pledged information resulting from changes to the rules would not be used to open new compliance investigations into personal service companies, used by contractors, for tax years prior to April 2020.
The government said it hoped this move would provide reassurance to individuals that any change in status as a result of the reform would not lead to HMRC opening a historic enquiry.
In response to concerns raised over the status of a client company based overseas, the government agreed legislation would be amended to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules.
As expected the Treasury denied calls to halt its reforms and confirmed the changes would proceed as planned on April 6, which it insisted was necessary to address the "fundamental unfairness" of the current system.
In today's review the Treasury predicted continued non-compliance with the IR35 rules in the UK would cost the Exchequer more than £1.3bn a year by 2023-24.
It warned this approach was "unsustainable" and would deny the taxpayer "significant revenue for essential public services".
The controversy surrounding the incoming IR35 changes first prompted the former chancellor, Sajid Javid, to pledge this review of the rules as part of the Conservative party’s manifesto in the lead up to last year's general election.
At the time Mr Javid said he wanted to make sure the proposed changes were “right to take forward” but when the Treasury announced the review last month, the industry branded the set up “hasty” and “meaningless”.
When current chancellor Rishi Sunak made reassurances earlier this week that the taxman would not be "heavy handed" during the first year of changes to off-payroll rules it sparked a fresh wave of fury from campaigners.
Some claimed these comments showed the Treasury had no intention of making significant changes to the IR35 shake-up despite the ongoing backlash from the business and contractor community - and their concerns appear to have been warranted.