IR35 Non-Compliance Penalties & HMRC Liabilities Explained
For medium and large UK organisations, misclassifying contractors under the off-payroll working rules carries financial risk. When a business fails to apply reasonable care, HMRC can also enforce substantial penalties.
What are the costs of IR35 non-compliance?
The cost of IR35 non-compliance includes paying the additional Income Tax and National Insurance contributions due, interest on the overdue tax debt, and in cases where the businesses has been careless, a penalty starting from 30% of the tax due.
HMRC calculates the penalty based on the behaviour that caused the error. Careless application of the rules attracts a penalty of 30% of the tax liability, which can be reduced to zero based on suspension conditions. Deliberate errors can reach 70%, rising to 200% for deliberate and concealed inaccuracies.
However, businesses should be mindful that the majority of the potential extra bill is related to carelessness, which means not taking reasonable care. The reasonable care bar is low, and businesses that implement robust processes should have no concerns. Once tax offsets have been considered (tax already paid by the contractor), the outstanding tax bill can be less than 10% of the contractor’s fees.
Who is liable for paying IR35 non-compliance penalties?
Under the off-payroll working rules, the deemed employer in the supply chain is liable for the unpaid tax, interest, and penalties resulting from an incorrect status determination.
If the hiring organisation fails to issue a Status Determination Statement to the worker and party below them, or fails to demonstrate reasonable care when assessing the status, the tax liability remains with them. HMRC can explore four previous tax years for Income Tax and six years for NICs. Income Tax can also extend to six years for carelessness and twenty years for deliberate tax evasion.
However, to reiterate, provided a business has a robust process in place they should not encounter difficulties during a compliance check.
Partner with the IR35 experts at IR35 Shield
Managing these liabilities requires rigorous processes and expert compliance workflows. Partner with the industry experts at IR35 Shield; we’re here to support you and your business every step of the way.
If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
