The majority of small and medium-sized enterprises (SME) in the UK are yet to formalize tax processes that would see them adhering to the IR35 rules, a new survey has shown.
Advisory firm BDO uncovered how over half (55%) of SMEs that use contract workers aren’t yet thinking about IR35 reforms, and will tackle the issue once the pandemic subsides and business returns, as much as it can, to what it used to be.
IR35’s goal is to tackle so-called “disguised employment”, in which self-employed contractors set up limited companies and pay themselves through dividends. That way, they can avoid being subject to National Insurance. However, it treats self-employed contractors as employees for tax purposes, without having to provide all the usual employment rights such as maternity leave, statutory sick or redundancy pay.
- Here’s our list of the best HR software right now
- We’ve built a list of the best small business tax software on the market
- Check out our list of the best small business accounting software available
According to Contractor Calculator, once IR35 gets enforced, contractors could lose up to a quarter of their earnings. As a result, a vast majority (85%) would consider quitting the public sector and working for private companies.
The IR35 came into effect in April 2021, meaning firms can now be investigated by HM Revenue and Customs (HMRC) if they don't conform. However HMRC has said there would be a “soft landing” in the first year for non-compliant businesses, but after this grace period ends, it will set up a taskforce to make sure businesses are adhering to the new regulation.
Expensive mistakes
“Businesses who do not comply will still need to pay tax and could face significant penalties,” City AM cited John Chaplin, employment tax partner at BDO as saying. “HMRC has shown that it will not turn a blind eye to non-compliance, so businesses who do not have a formal IR35 process in place should immediately rethink their affairs.”
“Failing to comply with IR35 certainly shows weak governance and can prove to be an expensive mistake. Unless a business can show that it has taken ‘reasonable care’ over its IR35 responsibilities, penalties can rack up pretty quickly.”
In late August, HMRC fined HM Courts & Tribunal Service $17.28 million for mismanaging the IR35 legislation, the media reported. This was also the third fine HMRC issued, with the Home Office and DWP also being hit with large penalties. The Home Office was fined $46.30 million for the “careless application” of the IR35, while DWP was fined almost $121.5 million.
- Here’s our rundown of the best bookkeeping software out there
Via CityAM
