What are the potential consequences if an organisation fails to use reasonable care when applying the IR35 rules?
Under the IR35 rules (also known as the off-payroll working rules), if an organisation within the scope of the rules (the client) engages a contractor for services via an intermediary, the client must determine whether or not the contractor would have had employee status had they been engaged directly rather than through their intermediary. When carrying out this determination, the client is required to take "reasonable care" in reaching its conclusion.
If the client fails to take reasonable care, it will be liable for the contractor's tax and national insurance contributions (NICs), as well as the employer NICs and apprenticeship levy, with interest charged for late payment.
HM Revenue and Customs (HMRC) also has the power to issue penalties, set at a percentage of the tax and NIC liability, depending on whether the non-compliance was careless or deliberate. HMRC has stated that: "customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance."
Medium- and large-sized private sector organisations are responsible for applying the IR35 rules from 6 April 2021.