Consequences of getting IR35 wrong

HMRC’s 12-month grace period which was implemented after the changes were first introduced in April 2021 has now passed. This means it is more important than ever that organisations are complying with the legislation and minimising their risks as much as possible.

Furthermore, HMRC has started their transition from education to enforcement and has already begun conducting compliance checks within certain sectors. These compliance checks are in the form of a letter which is designed to understand what processes the End-Hirer has put into place to manage their employment status assessments. If HMRC is not satisfied with the processes in place, it will conduct a full investigation.

If you would like to read more about the investigation process in full, please see our blog titled HMRC Investigations.

What are the financial penalties & fines?

If the conclusion of a HMRC Investigation is that the End-Hirer has made inaccurate determinations, the End-Hirer will be liable for 100% of the unpaid tax, National Insurance Contributions and Apprenticeship Levy, plus there will be financial penalties to pay on top of this.

The level of the financial penalty is based on the reason for the inaccurate determination as follows:

  • A further penalty of 30% of the unpaid tax if HMRC deems that the End-Hirer was careless about the employment status of its off-payroll workforce but did not know it was inaccurate.
  • A further penalty of 70% of unpaid tax if HMRC finds that the End-Hirer knew that the employment status of its off-payroll workforce fell Inside IR35 and yet chose not to act.
  • A further penalty of 100% of unpaid tax if HMRC finds that the End-Hirer has actively tried to conceal the employment status and underpayment of tax to its off-payroll workforce.

For example, for one Contractor on a day rate of £500, the End-Hirer would be liable to pay the unpaid tax and national insurance contributions equating to an estimate of £24,420. With an additional penalty of between £7,326 to £24,420 depending on the level of penalty the HMRC deemed to be appropriate after investigation, the total estimated liability would equate to between £31,746 and £48,840 for one inaccurate determination per year. This value is not inclusive of potential interest and late filing fees which could also be added.

It is also worth mentioning here, that the investigation itself can be extremely lengthy spanning over many years from beginning to end, and this can therefore bring extensive legal costs with it that would also be in addition to the financial penalties and fines mentioned above.

What are the non-financial risks?

Along with the financial penalties and fines, it is important that we discuss other non-financial risks that an inaccurate determination could have on the End-Hirer’s organisation such as:

Reputational damage – HMRC may publish details of organisations that are found to have made inaccurate determinations, this could therefore lead to significant reputational damage.
There is a very real risk that obtaining contractors and other temporary workers could become very difficult as contractors, agencies and other organisations may be reluctant to engage with them moving forward. Agencies and contractor’s choosing to engage with competitors instead as they may not want to be associated with an organisation which is perceived to be involved in tax avoidance.

Competitive disadvantage – An organisation that is known for a poor approach to legislation would suffer a disadvantage to its competitors and may be excluded from applying for Government contracts and be removed from Preferred Supplier lists.

Contractual Breaches – The organisation may even be in breach of contracts or terms and conditions they have agreed to and could be liable for indemnities and warranties under these if they have not complied with the legislation.

What have we seen HMRC do within the Public Sector?

So far, we have already seen a number of high-profile public-sector organisations being subject to huge fines and penalties at the hands of the HMRC for not complying with the legislation. The below case studies show that HMRC is taking the legislation change seriously!

£87.9 Million – The Department of Work and Pensions “DoWP”
After investigation, it was revealed that between 2017 and 2021, the DoWP had been incorrectly assessing the employment status of their flexible workforce using the HMRC’s online CEST tool, which resulted in an £87.9m fine.

£33.5 Million – The Home Office
HMRC found that the Home Office incorrectly assessed their flexible workforce’s employment and tax statuses between 2017 and 2021. This resulted in them receiving a £29.5m fine, along with a £4m penalty.

£4.3 Million – The National Health Service “NHS”
The NHS had Incorrectly engaged with contractors from 2017 to 2018. Even with the use of HMRC’s CEST tool, their audit outcomes were incorrect. As a result, they had to pay a £4.3m fine.
The above case studies indicate how the rules are being enforced in the public sector and provide a clear indication of how HMRC intend to enforce the rules within the private sector going forward.

How can Brookson Legal Services help?

Businesses can avoid a penalty if they can prove to have taken ‘reasonable care’ in determining the employment status of their off-payroll workforce, HMRC defines reasonable care as acting “in a way that would be expected of a prudent and reasonable person in the client’s position”. Examples of this include engaging with a specialist team to carry out all off payroll working compliance activity.

By engaging with an independent expert to carry out your employment status assessments, your organisation can prove that they have taken ‘reasonable care’ in your determinations, leaving you confident in your IR35 solution and minimising your risks.

Brookson Legal’s Mock Investigation service is perfect for identifying any risk. We act as HMRC and go through the investigation processes to ensure you can obtain the information required in the correct time period. We will review the information submitted and question you exactly how they would to ensure you are prepared and have everything to hand.

If you have further questions, Brookson Legal Services can help. Get in touch to speak to a specialist today.