What are the penalties if my IR35 status is wrong?

Kris Simpson explains IR35 

A freelancer working from her bed at home

With the new change, the payment for unpaid employment taxes, including Employers NI sits with the client.

Hello again, you’re back for my 4th article so you either like my work or you’re bored at work, either way welcome! Today I will talk through the penalties HMRC has in place for non-conformance of the Private Sector IR35 Reform.

The main reason the UK is concerned about the new reform is due to the fact it introduces the client into the IR35 mix. Up until now, failure to comply with IR35 rules fell swiftly and fully on the PSC contractor and consisted of payment for unpaid employment taxes dating as far back at seven years (ouch). Which for most contractors was a risk worth the reward as the PSC Contractor would benefit from a more profitable tax structure.

With the new change, the payment for unpaid employment taxes, including Employers NI sits with the client. Now a single case might be worth the risk, but when you multiply the risk over let’s say 100 contractors, it snowballs.

Storslagna idéer är inget som skrämmer entreprenören. Ju galnare desto bättre!

Let me show you an example
One contractor with an average daily rate of £350 equals £1,750 weekly cost via a PSC

Now the PAYE breakdown on this (roughly) is below:

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 example above is £678.14 per week, I don’t need to multiply that number by 100 and then by six months for you to realise the risk is high. Let’s also not forget that HMRC can levy an additional penalty and interest on these payments. This can be up to 100% of the amount owed, yes that means you could pay double the amount per contractor, one amount for correcting taxes and NI the other as the penalty.

Now it’s not all doom and gloom, there have been recent changes which soften the blow. Unlike the original draft legislation, only payments for services delivered after April 6 2021 will fall under the scope of the change. More importantly, HMRC has agreed that no penalty will be levied for infringements within the first 12 months. Now the client will still need to pay the missing tax and NI, but they will not add any penalties.

And there you have it, well almost, I have one more article to write which will explain how to mitigate all of this risk. So if you want to know the safest and most compliant way to manage this liability without removing the flexible workforce, give it a read.