The Cost of Non-Compliance with the Off-Payroll in the Private Sector Rules

The HMRC estimates that only 10% of personal service companies apply the IR35 legislation correctly, causing the Government to have lost out on an estimated £700 million in employment tax payments across 2017/2018. In a bid to cut the cost of such non-compliance the Government is slowly changing the way in which IR35 is policed, shifting responsibility for determining the application of the legislation onto end hiring organisations and recruitment agencies rather than individual Personal Service Company’s (“PSC”).

Whilst the public sector has already experienced the changes, the private sector is very much preparing for the battle ahead after April 2020. The Government has borne the cost of IR35 non-compliance since 2000, but what will be the cost of non-compliance to private sector organisations once the changes are rolled out?


The HMRC has powers to investigate the tax compliance of organisations, and this power will stretch to allow them to explore the employment status of any off-payroll workers providing their services to private sector clients.

Where it is found that an individual has been incorrectly categorised as being outside of IR35, the HMRC will issue a determination requiring the unpaid PAYE tax and National Insurance Contribution liabilities, including any late payment fines and interest to be paid by the end hirer.

On top of those liabilities and fines, HMRC have the discretion to issue a penalty ranging from 0-100% of the initial outstanding liability. The weight of the penalty will rest on a number of factors, for example how co-operative your organisation has (or has not) been throughout the enquiry process, and to what extent reasonable care has been taken over the application of IR35 to any off-payroll worker. If an incorrect determination has been made in the absence of reasonable care, it is likely that a severe penalty would be awarded alongside the unpaid taxes.

It is clear that non-compliance with IR35 can bring with it potentially crippling financial implications for a business, but this is not the only risk to bear in mind.


It is not only financial damage that can be caused by failing to apply IR35 correctly. We all know the saying ‘you tell good news to one, but bad news to ten’; if your business does not take appropriate care over making IR35 determinations, or makes incorrect determinations, there is a very real risk that obtaining contractors and other temporary workforces could become difficult.

The ‘reasonable care’ test does not only need to be considered when determining whether IR35 will apply, but the same level of consideration should be present when assessing which off-payroll positions fall outside the scope of the legislation. The adoption of a blanket ban approach does not demonstrate that reasonable care has been taken to classify such roles for employment tax purposes, and goes against confirmation from HMRC that working through a personal service company is not being outlawed by the IR35 changes.

Reputational damage is a genuine prospect for businesses who do not take the time to carefully consider the application of IR35 following the new rules, and you could see a reluctance from the flexible workforce to engage with your organisation.

Competitive Disadvantage

Linking to the above costs to reputation, an organisation who becomes known for its poor approach to the IR35 rules could very much suffer a disadvantage in comparison to its competitors.
On the other hand, having confidence that your organisation is taking the correct approach to the rule changes and is applying IR35 correctly can be used as a positive tool to encourage independent contractors to continue to engage with you.

Do not allow your business to lose out to competitors where IR35 is concerned – time has been afforded by the Government to allow end-hiring organisations to get to grips with their impending responsibilities and adopt a confident and correct position.

The IR35 rule changes are being affected to combat non-compliance with the law, and all affected businesses should embrace this period of change and recognise it as an opportunity to grow. Brookson Legal Services understands that IR35 is a complex piece of legislation, and so our help is at hand. We offer a professional, tried and tested service to assist you in your preparations for April 2020. Don’t get left behind in the wake of the changes; seek independent advice now and reap the benefits well into the future.

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