What are the consequences for contractors of non-compliance with IR35?

If a contractor doesn't comply with the IR35 legislation, there are only consequences if the original rules still apply. However, under the new rules, there is no risk of tax liability. The purpose of the IR35 reforms was to transfer the responsibility of determining the contractor's employment status and any associated tax liability from the contractor's limited company to the client. The original rules will only apply if the client is considered small.

Under the off-payroll legislation, the client or fee-payer owes the tax debt and does not transfer it to the contractor.

However, contractors should be cautious not to sign contracts with onerous indemnity clauses that obligate them to pay their clients' tax bills if HMRC investigates. As a business, always get contracts checked by lawyers before signing them.

Where the old rules apply, in addition to the current tax year, HMRC can look back up to four years for income tax and six years for national insurance contributions. A further two years for income tax can be considered if the contractor was careless.

A contractor that has ignored the legislation and has no documented audit trail of considering and applying the legislation would be considered careless. HMRC can then add penalties of circa 30% on top of the tax.

If an assessment finds a contractor "Inside IR35" and they choose to disregard it without a clear evidence trail explaining the decision, this may be seen as wilful non-compliance. In cases of wilfulness, the tax liability can be shifted from the contractor's company to the contractor personally.

To avoid the consequences of non-compliance, it is important for contractors to take the IR35 legislation seriously and to take professional advice if they are unsure of their IR35 status. IR35 Shield Ltd can help contractors understand the IR35 legislation and take the necessary steps to ensure compliance.