IR35 experts caution UK freelance sector over HMRC’s ‘soft-landing’

Freelancers who incorporate their businesses to become limited companies are being urged to take HMRC’s promise of a ‘soft-landing’ for a new IR35 regime with a pinch of salt.

Firstly, the soft-landing whereby engagers will apparently be helped by HMRC to reflect the complex off-payroll rules correctly, when they bite on April 6th 2021, will only last 12 months.

Secondly, while there will be no penalties in the new regime’s first year, if an end-user gets a freelancer’s IR35 status wrong, HMRC will still demand outstanding tax owed, say experts.

'Red herring'

“And tax liability dwarfs penalties,” warns one such expert, Seb Maley of Qdos, which says end-users will also face the demands if they fail to meet their new obligations under the rules.

“[So while] HMRC insists [in a new policy paper that] a ‘light touch’ will be taken with regards to IR35 compliance when the reform lands on April 6th… this is a red herring.”

David Harmer is another IR35 expert who believes that the “light touch” (stated by HMRC in its Feb 15thpaper) does not reflect the urgency of the potentially taxing situation that looms.

'False sense of security'

“I fear that the ‘soft-landing’ of penalties may lull some into a false sense of security that they need not act immediately – this is simply not the case,” the Markel tax adviser told FreelanceUK yesterday.

“While penalties may not be levied on day one, tax and NI will certainly be sought.”

Matt Fryer, of Brookson Legal, says HMRC’s suggestion in its paper of a soft-landing, notably “supporting customers trying to do the right thing,” makes for “interesting reading.”

Especially, he suggested, when it features alongside eight new IR35 “compliance principles,” one of which reveals HMRC has a new “specialist team” to carrying out compliance activity.

'Caution'

“While penalties may be waived for businesses that correct accidental mistakes, any tax which is discovered to be owed by companies and agencies that have failed to demonstrate ‘reasonable care’ will still be recovered,” Mr Fryer says.

“For this reason, I would caution businesses against cutting corners to meet the April 6th deadline.”

Julia Kermode, formerly of freelance body the FCSA, also sounded a cautionary note to any worker or end-client deducing a light-touch by the taxman means hardly any touch at all.

'HMRC will challenge, and take action'

“The premise of HMRC's briefing issued today is to warn firms and contractors to comply with the off-payroll rules,” Ms Kermode, founder of IWORK began in an online post.

“The briefing states that HMRC will help you meet your responsibilities, and will help you correct any mistakes.

"However, they will challenge deliberate non-compliance, and will take action if contractors are engaged through artificial, contrived arrangements which are claimed to avoid the application of the off-payroll working rules”.

'Be afraid; be very afraid'

Status expert Kate Cottrell hoped the policy paper would contain HMRC-promised research into IR35 in the public sector, where a forerunner of the April 2021 framework was introduced in April 2017.

“This was an opportunity for HMRC to publish that long-awaited evaluation,” the former inspector says, referring to the research which the government committed to carrying out almost a year ago, to help smooth the upcoming implementation in the private sector.

The co-founder of IR35 advisory Bauer & Cottrell also told FreelanceUK: “Still no sign of the research yet though. So all in all, and from reading the HMRC policy paper, it’s difficult to interpret what HMRC is saying as anything other than ‘be afraid, be very afraid.’”

In the policy paper, HMRC explains how the new IR35 rules will operate; who will be affected and what to expect from the tax authority, in addition to links to HMRC’s previous off-payroll briefings and guidance, plus new case studies to help illustrate to taxpayers compliance and non-compliance from April 6th.