Businesses will not be penalised for errors relating to IR35 in the first 12 months, it has been announced.
The news comes just weeks ahead of the introduction of the new off-payroll working rules which could see some contractors taxed the same as employees.
Under existing rules, a contractor who works like an employee – but is paid through a limited company – should broadly pay the same Income Tax and National Insurance Contributions (NICs) as other employees.
Until 06 April 2021, it remains the case that the contractor is responsible for ensuring that the right tax is paid.
After this date, however, the employer will become responsible for determining whether IR35 rules apply, as will the liability for any underpaid tax and penalties.
But realising the burden this may place on businesses during an already turbulent time, HM Revenue & Customs (HMRC) has confirmed that penalties will not be charged for accidental errors in the first year.
The latest guidance states: “You will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months of the operation of the new rules unless there’s evidence of deliberate non-compliance.”
It adds: “If you realise you have made a mistake in applying the off-payroll working rules, you should tell us about it at the earliest opportunity. We can work with you to put it right, whether that means paying unpaid tax or refunding overpaid tax.
“Where additional tax is payable as a result of a mistake, penalties may be due. However, if you tell us early and work with us to correct the mistake it can help mitigate any penalties.
“We will not charge a penalty if you took reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations.”