Consequences of not complying with IR35 in 2024

‘Reasonable care’ when determining IR35 status:

In accordance with Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 ( ITEPA), the End-Client should take ‘reasonable care’ when determining the IR35 status of its workers. If the Client does not take reasonable care which leads to the status determination being incorrect, the liability to pay unpaid tax, penalties and interests will rest with them. 

Unpaid Tax 

The End-Client will be liable for the unpaid employment taxes if HMRC deems that the End-Client has made inaccurate classification determinations of its workers. This can be backdated to 2021 in the private sector, and 2017 in the public sector. 

Interest

Interest payments will also be applied, and this is calculated from the date the taxes were due and continues to accrue until HMRC receives payment.

Penalties 

“The penalty incurred by the End-Client can vary depending on the circumstance:

• A 30% penalty on unpaid taxes if HMRC determines that you were careless about your employment status but were unaware it was incorrect.

• A 70% penalty on unpaid taxes if HMRC concludes that you knew roles were within IR35 but chose not to treat them as such.

• A 100% penalty on unpaid taxes if HMRC discovers that you deliberately tried to conceal the employment status which led to an underpayment of tax attributed to off-payroll workforce. “

Non-Financial Consequences

Reputational damage, class action, legal fees, unwanted distraction, further scrutiny from HMRC into other areas,  all this can impact on business as usual activities and lead to cost cutting exercises 

IR35 cases in the news:

Misclassifying workers is a major problem which can create risk and result in huge fines, if workers are not assessed correctly and the correct IR35 status is not achieved. The below case studies show how public sector organisations have succumbed to  hefty fines and penalties for not correctly applying the IR35 legislation.

Department for Environment, Food and Rural Affairs (DEFRA)

DEFRA was fined £86.5 million for IR35 non-compliance with HMRC, despite using 

HMRC’s own CEST Tool.

The National Health Service (NHS)

NHS Digital was fined £4.3 million for engaging with contractors incorrectly from April 2017 to March 2022.  

Innovate UK 

Innovate UK incurred a £36 million fine due to incorrectly classifying the employment status of certain contractors during the 2018/19 to 2021/22 tax years.

How can Cocomply help you

While the IR35 rules are complex, it is completely achievable to embed IR35 assessment processes that reduce risk and ensure contractor talent is engaged correctly and compliantly. These processes can help organisations navigate the complexities of IR35 legislation, minimise the risk of non-compliance, and maintain a flexible workforce without incurring hefty penalties. By implementing robust assessment procedures and staying informed about the latest developments in IR35 regulations, businesses can confidently engage contractors while remaining on the right side of the law.

Please reach out to us Below for more information on how to establish effective IR35 compliance strategies tailored to your organisation's needs.