Tax  

HMRC doubles down on 'light touch' IR35 promise

HMRC doubles down on 'light touch' IR35 promise

The taxman has reaffirmed its commitment to a 'light touch' approach to IR35 penalties in the first year of the controversial rule changes. 

In an update yesterday (February 15) HM Revenue & Customs doubled down on its promise not to open a new compliance enquiry into returns for tax years before 2021-22 using information acquired as a result of the changes to the off-payroll working rules, unless it suspected fraud or criminal behaviour.

It comes ahead of reformed rules set to be introduced in April 2021 which will see every medium and large private sector business in the UK become responsible for setting the tax status of their contract workers. 

This is despite widespread calls for the changes to be scrapped altogether, with chairman of the Treasury committee Mel Stride calling for the abolition of the "dreaded" IR35 tax rule in October last year. 

It followed findings from a Lords select committee last year which urged the government to "completely rethink" the IR35 rules in a damning report which found the changes would put too great a burden on businesses. 

In yesterday's update HMRC said it understood "mistakes could happen" and taxpayers would not face penalties for inaccuracies relating to the off-payroll working rules in the inaugural year of the rule changes.  

The taxman said: "If we see that you have made a mistake, we will support you to understand how to apply the off-payroll working rules correctly...we will encourage you to self-correct errors before we consider if we need to intervene further."

But HMRC said it would also challenge "deliberately non-compliant customers" and would in certain cases publish details of defaulters to "encourage them to put their tax affairs in order". 

It added: "This is an important part of our approach and helps to drive trust of honest taxpayers, who want to know we will create a level playing field by ensuring the deliberately non-compliant don’t get an unfair advantage." 

The rules were originally timetabled for April last year, but were delayed by the government until next year in light of the coronavirus crisis. 

Currently the off-payroll rules only apply to the public sector, but the Treasury has always maintained reform was necessary to address "fundamental unfairness" surrounding non-compliance.

Introduced in 2000, IR35 is an anti tax avoidance rule that applies to all contractors and freelancers who do not fall under HM Revenue & Customs’s definition of being self-employed.

rachel.mortimer@ft.com