Why HMRC’s IR35 'soft landing' ending should help contractors in 2022

Focusing on the year ahead, an important event in the IR35 calendar is the end of the so called ‘soft landing’, which has given businesses impacted by IR35 reform a 12-month grace period where HMRC will not issue financial penalties for non-compliance, writes Seb Maley, CEO of IR35 contract review firm Qdos.

A hinderance, more than a help to the bonafide

This ‘soft-landing’ or, ‘light touch’ as it has also been described, is an interesting one. When the government announced that medium and large businesses wouldn’t be penalised financially for non-compliance up until April 6th 2022, too many firms saw this as a reason not to worry much about IR35 compliance. So in some respects you could say that this penalty waiver has hindered rather than helped contractors.

But ultimately, the HMRC ‘soft landing’ is a red herring -- a point that we have been stressing to thousands of businesses we support with IR35. Yes, no penalties in the private sector have been issued yet. However, this isn’t to say HMRC can’t demand outstanding tax liabilities from businesses within this tax year, should the taxman find that a contractor has been incorrectly placed outside IR35. And when it comes to IR35, tax liabilities dwarf penalties!

Generous, supportive, lenient? That time is nearly up

So as we approach April 6th 2022 and the end of the first full year of private sector IR35 reform, I suspect that HMRC will think it has been generous enough and is preparing to ramp up its compliance activity. After all, along with tax liabilities, being able to hit businesses with fines for getting things wrong is another way for HMRC to raise revenue for the Treasury.

With the soft landing soon to end, speculation is also mounting over whether HMRC will reduce the level of support available to businesses. Questions around this are being raised after the financial secretary to the Treasury, Lucy Frazer, mentioned that HMRC’s collaborative approach to compliance formed part of the soft-landing.

So will HMRC pull back on the off-payroll support it offers businesses soon? Potentially. As I mentioned above, by HMRC’s standards, firms have been allowed a degree of leniency by the taxman. I can’t envisage it lasting much longer.

Relentless HMRC

Furthermore, while the tax office has a remit to help support people and businesses with their obligations, HMRC itself states in its ‘Purpose, Vision and Way’ document that it is “relentless in pursuing those who bend or break the rules.”

Added to this, and from where I stand, the support offered to businesses by HMRC -- which includes blindly promoting the use of the deeply flawed CEST tool -- leaves a lot to be desired. As a result, HMRC potentially offering less of this going forward is not necessarily a problem.

So for end-clients, the implications of the soft landing finishing are relatively clear. But what, if anything, might it mean for contractors?

Introducing the 'by the book' approach...

There will of course be a knock-on effect of businesses potentially facing greater scrutiny over their IR35 processes. And it’s a knock-on effect that may prove to benefit contractors, believe it or not. With the threat of hefty financial penalties hanging over organisations -- whether end-clients or recruitment agencies -- the need to do things by the book inevitably becomes far more important.

Remember the backdrop. A £33million IR35 bill has been handed to the Home Office, published in its 2020/21 accounts, of which £4m was a penalty for the “careless” application of IR35 reform. This should (in theory) serve as an important HMRC warning to businesses -- abuse the rules and face severe financial punishments.

Granted, in this instance, HMRC penalising a government department is wooden dollars, but it may prove key in hammering home the message to businesses that they must prioritise compliance.

The sort of U-turns contractors will actually welcome

With this in mind, and as we approach the end of the soft-landing in just 12 weeks, more businesses could make U-turns over short-sighted and non-compliant blanket determinations. These are the unnecessary decisions that have left thousands of contractors with no option but to operate inside IR35 or have their contract cancelled.

In our experience of late, we are seeing more businesses take a fair, pragmatic and sensible approach to the reform. This strategy is one that prioritises compliance and allows genuine contractors to operate outside the scope of IR35. Maybe this is businesses’ way of preparing for no more soft landing from HMRC!

Righting the many wronged?

As we close in on what is a seemingly minor change in the Intermediaries legislation, the prospect of penalties -- which can and I imagine in due course will be issued to businesses for non-compliant blanket IR35 decisions -- may be crucial in helping contractors, far too many of whom have been treated unfairly following the introduction of reform last April.