The government published its response following the conclusion of its review of changes to the off-payroll working rules (IR35).

The report outlines a number of changes the government has identified to address concerns and support the smooth and successful implementation of the reform. The government first announced in January 2020 that it would launch a review of the implementation of the April 2020 reform.

HMRC confirmed the new chancellor of the exchequer Rishi Sunak’s announcement earlier this week which promised that enforcement by the HMRC is “not going to be at all heavy-handed,” for the first year of IR35’s implementation.

The government said it will take a light touch approach to penalties. 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.

“The government is grateful for the contributions to the review,” the report stated. “While there remains some opposition to this change, the government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules. The reform will therefore go ahead on 6 April 2020.” It added that, “the government will continue to listen to stakeholders, and monitor and evaluate the operation of the rules.”

Earlier this week contractors’ representatives from a range of industries called on HMRC to delay or abandon IR35 in favour of an alternative during an evidence session held by Finance Bill Sub-Committee.

In its report, the government also said it would place a legal obligation on clients to respond to a request for information about their size from the agency or worker, and update the legislation to address concerns raised over the rules as they apply to off-shore companies.

Furthermore, HMRC confirmed their previous commitment that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6 April 2020 and that the rules will only apply to services carried out from 6 April 2020 onwards.

Sophie Wingfield, Director of Policy at the Recruitment and Employment Confederation said, “It’s a positive move that the Treasury is putting the obligation on small businesses to declare whether the IR35 rules apply to them. This is a direct response to what the REC has been calling for and should provide recruitment businesses with much needed clarity on their obligations.” 

However, Wingfield added, “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves. The consequences of not complying with tax law should be clear. Not doing so could create an unlevel playing field where compliant employers lose out to unethical ones. We need to see more details about how this approach will work in practice. What’s obvious from this is that the Treasury know IR35 is not quite right. Rather than tinkering around the edges of this complex legislation, we need the government to delay implementation until 2021 to make sure it’s done properly.”

Samantha Hurley, Director of Operations at the Association of Professional Staffing Companies, and Co-chair of the government’s IR35 Forum, said the review was a ‘significant win for the professional recruitment sector’.

“HMRC has long maintained that it genuinely wants businesses to comply with the new rules and that there will be no witch hunt – and this latest move suggests this may truly be the case. The fact that it has also published additional guidance to educate the supply chain is welcomed by APSCo,” Hurley said.

Qdos CEO, Seb Maley, CEO of IR35 expert Qdos, said, “While applying a ‘light touch’ to reform for the first 12 months has been welcomed, this is a red herring. It only applies to ‘penalties’, not necessarily tax liability owed as a result of inaccurate IR35 determinations. Therefore, private sector companies should not pay too much attention to this.

Julia Kermode, Chief Executive of the Freelancer & Contractor Services Association, said, “The FCSA welcomes confirmation from HMRC of the Chancellor’s promised ‘soft landing’ in respect of the off-payroll reforms, particularly as there is mounting evidence that clients have been unable to fully prepare in advance of the April 2020 changes. However, we are cautious that this may cause more confusion if clients and contractors are misled into thinking that the legislation has been delayed or will not be enforced.”

Kermode added, “It has been clear to me for some time that HMRC has been hell-bent on planning to implement the off-payroll reforms this April come what may, and the publication of their review clearly shows that these reforms are coming whether we like it or not. I can’t see the budget on 11 March bringing about a U-turn, so it would seem that the House of Lords inquiry into the legislation is the last hope to affect any meaningful change.”