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IR35 off-set rule – penalties
There are further issues stemming from Dave Chaplin’s article ‘Correcting the balance’, Taxation, 7 December 2023 and my feedback comments published on 4 January 2024.
I note from comments I have read on social media that there is still some confusion over the extent of the proposed changes to IR35 announced in the Autumn Statement. There is the suggestion that these changes remove the risks to the end client and that therefore this should remove the potential risks to them of engaging workers off-payroll. Sadly, that is not the case.
A point not mentioned yet is the issue of penalties. The announcement mitigates the tax payable by the end client if there is an error over whether a payment is considered to be within or outside IR35. Clearly that was good news because it takes away the possible double taxation of earnings which are considered to be within IR35. However, the proposals do not have any impact on penalties which can be charged by HMRC on end clients if an error arises under IR35. The proposed changes mirror the rules under Demibourne [2005] (SpC 449) which apply when a worker incorrectly treats earnings outside PAYE.
It is therefore important for end clients and their advisers to be aware that if there is an error in the application of IR35, while the proposed change does mitigate the income tax and National Insurance, it still leaves the liability to penalties which is calculated on the previously determined figures prior to any reduction based on the proposed rule change.
On this basis care is still needed by end clients to ensure compliance with IR35 since the penalties could be significant.
Independent employment tax consultant,
Email: alastair@akets.net.
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