Accountants can breathe a sigh of relief for IR35’s soft landing
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IR35 (also referred to as “off-payroll working rules”) in the private sector finally came into effect on the 5th of April. This will ensure that individuals who work like employees but operate through their own limited companies will pay the same tax level as employees on company payroll.
This will require accountants to work with company clients to check the legal status of contractors who they engage with. If these individuals are found to be classified as “deemed employees” by operating Personal Services Companies (PSCs), the client employing them will have to meet taxes owed, as if they were employed, as well as any potential fines.
While this is likely to create an administrative burden for accountants checking client contractors and freelancers' legal status, HMRC announced in February that IR35's implementation would consist of a soft landing. The headline guidance revealed that penalties for inaccuracies would not apply for 12 months, as well as a commitment to not use information gleaned from the rollout of IR35 to create enquiries into historic tax years.
This announcement will ease the burden on accountants by giving them more time to advise their clients correctly and minimise any associated administration.
Key points from the soft landing
The overriding compliance principles that formed part of the soft landing announcement consisted of HMRC seeking to support accountants and businesses in understanding and implementing the new rules. This includes offers of support such as webinars, workshops and one to one phone calls.
The principles assume goodwill and compliance from customers, with HMRC actively seeking to challenge deliberately non-compliant customers and tax avoidance schemes.
A commitment to not opening up cases in prior years
HMRC’s commitment to not using information obtained from previous tax years to assess off-payroll working before 2021/22 will ease working relationships between accountants and tax authorities. This will allow information requests to be fulfilled in the current tax year without accountants having to worry about the possibility of this unearthing new tax cases from historical data.
Light touch penalties
To support those seeking to comply and do the right thing, penalties will not be enacted for the first 12 months of IR35 to April 2022. This is caveated by HMRC stating that fines will still apply to those whose inaccuracies result from deliberate non-compliance.
The soft landing will make it easier for accountants to help their clients comply
The soft landing gives accountants an opportunity for both themselves and their clients to understand the scope of IR35.
They should take this opportunity to review HMRC’s support tools to best advise their clients on whether they will need to change the engagement status of contractors they work with.
Available resources include the Check employment status for tax tool, which allows businesses to assess whether IR35 applies to contracts by answering a series of questions including worker responsibilities, whether a substitute can complete their tasks and whether workers have to provide their own equipment.
Additional resources are provided on HMRC’s Help and support for off-payroll working page.
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The first-year assessment of IR35 is likely to identify client contractors who fall within the scope of IR35.
While many of these individuals may intend to operate through an umbrella company, clients will likely want to take on key contractors as full-time PAYE employees to secure their services.
Payroll is labour-intensive and time-consuming. Adding new employees at short notice will create additional work for accountants, including manual entry related to set up, alongside the risk that payment data for first-month employees will be paid incorrectly.
Accountants can save time administering payroll changes by incorporating a connected payroll and payments system such as the Modulr Payments Dashboard. This provides a centralised solution merging payroll and payments to create a cost-saving and synched process, which has automation features that save time and reduce the instance of errors.
This will be particularly useful at a time when multiple changes are made to payroll at short notice.
Payment integrated payroll solutions are also likely to be in high demand during the introduction of IR35 for accountants who specialise in payroll services for umbrella companies. Umbrella companies are commonly used as a vehicle for freelancers to get paid, and result in them being taxed as employees. It is expected that their usage will soar in light of IR35 being introduced, with specialist accountants having to add scores of employees at short notice.
The soft landing reforms to IR35 provide a lifeline to accountants to ensure that they provide the right advice and level of support to affected clients. While fines are unlikely to accrue for those who fall within IR35 during its first 12 months, accountants will need to be agile and leverage automation and efficiency gains from payment integrated software products to make timely changes to client payroll.