Written by Paul Chappell
Published on January 17, 2020
ir3 compliance hmrc penalties

Happy New Year! I thought I would start the New Year with a bang in the latest in my series of blogs; essentially Dataplan’s version of ‘IR35 for dummies.’ Don’t forget that the 6th April 2020 sees the responsibility for assessing what is inside IR35 and what is outside IR35 from the worker to the engager as I mentioned in my last post on IR35 assessment responsibility. If you’re wondering how to avoid IR35; you can’t, but you can ensure that you have taken reasonable care to remain compliant by following my guide.

Today I will be looking at the cost of getting the assessment wrong and what the implications of doing so are. A cheerful start but it is important that you are all aware of the pitfalls are of underestimating IR35 compliance.

HMRC place the responsibility for getting tax and National Insurance Contributions (NIC) correct on taxpayers, including employers in the case of off payroll working. That responsibility is important because if you get it wrong, they will expect you to pay the PAYE and NIC that you did not deduct together with (potentially) a hefty penalty as well as interest for a late payment.

Let’s look first at the liability if an IR35 test has not been done or has been done incorrectly and HMRC look to recover the PAYE and NIC. Tax is deducted from off payroll workers at the Basic Rate of income tax, irrespective of the amount of earnings (unless and until they send a revised tax code out.)

For the sake of the example let’s assume that the worker has been engaged since the start of the 6th April 2020 and HMRC call to discuss the engaging of Off Payroll workers in January 2022 tax year (bearing in mind that the engagers responsibility for getting the IR 35 assessment correct starts from 6th April.)

Example Calculations

The worker has invoiced £2500 per month, this amount has been paid in full without deduction. Now for the purposes of the calculation I will use the current (2019/2020) tax and NIC rates and thresholds as my crystal ball doesn’t show the rates for the next 2 tax years.

Tax is simple, a straight 20% on the amount paid, £2500 at 20% is £500 per month. NIC is slightly more complicated as we need to take into account the Primary Threshold, currently £719 per month.

Employees NIC is therefore £2500 less £719, £1781 at 12% is £213.72, employers on the same amount at 13.8% is £245.77.

Engaging a worker under the IR35 rules will therefore cost the engager the invoiced amount plus employers NIC costs, in this example £2500 plus £245.77 per month.

The worker will be paid £1786.28.

What about double taxation? That is something that HMRC will only take into account for a closed tax year, in other words a year for which the worker has declared income through self-assessment. HMRC will, normally, only tax one parcel of income. If the worker has declared the income through self-assessment, they will consider a double taxation claim by the engager. I would recommend this is always discussed with HMRC as part and parcel of the settlement discussions.

We are now in a position where they will consider the behaviours that have led to the failure to consider off payroll working correctly. They consider behaviours when looking at penalties.

There are 4 criteria for consideration, they are:

• Reasonable care

• Careless

• Deliberate but not concealed

• Deliberate and concealed

Reasonable Care

If reasonable care has been taken, but according to HMRC a wrong decision arrived at, a penalty will not be pursued. This could be information provided by one of their helplines incorrectly. Care was taken to contact them but they gave incorrect advice.

Careless

A careless error as lead to underpaid tax. They refer to careless as not taking reasonable care which does not provide a clear definition. The reality is that an error or mistake was made that leads to an underpayment of tax. For off payroll working purposes, unless it can be argued that an engager was careless in completing the CEST tool (essentially an IR35 calculator), it is unlikely that a careless penalty will be considered.

Deliberate but not concealed

Deliberate but not concealed in an off payroll working scenario will be the failure to operate PAYE despite having used the CEST tool, establishing that IR35 legislation applied but going against the decision and paying the worker without deduction. There has been no concealment but the engager has chosen to ignore advice or information that would have resulted in PAYE applying.

Deliberate and concealed

The most serious offence. Knowing that PAYE should have applied but concealing the payment to the worker, maybe by creating a false invoice to hide the payment.

HMRC Penalties

Now we have established that penalties can be and will be charged by HMRC.

Reasonable Care

No penalty charge.

Careless

0 – 30% of the tax and NIC liability. However careless penalties can be suspended and ultimately discharged if they can set conditions that can be set to improve future compliance.

Deliberate not concealed

20% to 70% of the tax and NIC liability.

Deliberate and concealed

30% to 100% of the tax and NIC liability.

There are ranges within each sector because HMRC take into account the quality of any disclosure that is made. This takes the form of telling (reduction of up to 30%), helping (up to 40%) and giving access to records and information (up to 30%.)

If full assistance is given to them in a deliberate but not concealed case, the penalty will be 20% as the full 100% reduction will be given.

To Summarise

IR35 changes the responsibility from workers self assessment over to the engager, and the penalties can certainly substantially increase the amount payable to HMRC if an IR35 assessment is wrong. It is always best to fully comply with their enquiry, as this will help to mitigate penalties.

Preparation is the key when dealing with HMRC. For them this means getting the employment status considerations in place sooner rather than later and using the CEST tool. Alternatively, a detailed review of off payroll workers should be undertaken by a specialist in employment status.

If you would like further assistance with reviewing your off payroll workers Dataplan offer expert consultancy services to take the stress out of IR35. To learn more about off payroll working you can read my previous post where I answered the question, what is ir35? Stay tuned for my next post to keep up to date with IR35 news.