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What are the IR35 penalties?

In this article, we explain what penalties an incorrect IR35 status may cause. Before we dive into the topic, we recommend that you take a look at our comprehensive IR35 guide to get a good understanding of what IR35 legislation means.

Determining your IR35 status can sometimes seem tricky, and although it is the client’s responsibility, it is good to be aware of the IR35 penalties imposed by HMRC for non-compliance with the Private Sector IR35 Reform.

What is IR35 compliance?

Up until now, failure to comply with IR35 rules fell swiftly and fully on the PSC contractor, and consisted of paying unpaid employment taxes dating as far back at seven years (ouch). This was a risk worth the reward for most contractors because the PSC contractor benefited from a more profitable tax structure.

The main reason why the new IR35 change gained attention in the UK was due to the fact that it brought the client into the mix to comply with IR35. With the IR35 Reform, the client will pay any unpaid employment taxes, including Employers NI. It may be that a single case is worth the risk, but when the risk is multiplied by 100 contractors, the impact is huge. And that’s why it’s important to understand how to be IR35 compliant.

Additional IR35 fines for non-compliance

The HRMC granted organizations an additional 12 months to soften the blow of the changes when the new IR35 Reform came into effect in April 2021. During this 12-month period, non-compliance with IR35 regulations did not result in additional IR35 fines, but the client was responsible for paying the missing tax and NI. However, after April 2022, HMRC considers that the private sector has had time to familiarize themselves with the legislation and guidance, after which IR35 penalties can be imposed if the rules are applied incorrectly.

And that’s really all we know about IR35 penalties at the moment. It is important to know how to be IR35 compliant and follow tax legislation carefully. There is a need for flexible workforce and for contractors now and in the future, and with safe and compliant liability management, you can continue to employ contractors without worry.

Impact of IR35 non-compliance penalties

The example table below shows the weekly PAYE breakdown of one contractor. A contractor with an average Daily Rate of £350 is equivalent to £1,750 weekly through the PSC.

Now the PAYE breakdown on this (roughly) is:

Gross Pay£1968.59
Employers NI£218.59
Tax 20%£144.23
Tax 40%£315.32
Employees NI£111.23
Net Wage£1179.22

The total liability per contractor based on the above example is £678.14 per week. I don’t need to multiply that number by 100 and then by six months for you to understand that the risk is high. Let’s also not forget that HMRC can levy an additional penalty and interest on these payments if there is IR35 non-compliance. Penalties can be up to 100% of the amount owed, yes that means you may have to pay double the amount per contractor, one amount for correcting taxes and another penalty for NI.