HMRC provide advice on self-employed tax returns
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HMRC has been forced to issue a number of tax penalties in recent months as various Government departments were found to fall foul of the rules. IR35 tax legislation was originally updated in 2017, where public bodies were required to assess and manage the tax status of contractors and/or self-employed people they hired.
However, in April 2021, these rules were extended to the private sector and medium to large businesses are required to set the tax status of off-payroll workers they hire.
Many warned this would raise financial and administrative costs for companies and would hinder the usage of freelancers.
Research from the likes of the Association of Independent Professionals and the Self-Employed (IPSE) has shown freelancers have been hit by IR35 changes and unfortunately, the complex rules in place have affected the Government itself.
In late July, the Department for Work and Pensions (DWP) were issued with a £87.9million HMRC tax bill for incorrectly determining the IR35 status of contractors since 2017.
Following this, the Home Office was also issued with a £33.5million penalty for “careless” IR35 tax failings.
This week, the HM Courts & Tribunal Service (HMCTS) was the latest public body to be issued with a penalty.
HMRC issued HMCTS a £12.5million tax bill due to mistakes it made when determining the IR35 status of contractors it hired.
While this may be worrying news for self-employed workers, it does appear steps are being taken to avoid these issues in the future.
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In response to the penalty, a Ministry of Justice spokesperson assured: “Strict checks and extra controls have been introduced to ensure that tax rules are applied correctly.”
These extra controls include a new internal HMCTS specialist tax advisory service which checks and confirms any “outside of scope” determinations.
Generally, IR35 rules apply where a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.
It should be noted an intermediary will usually be the worker’s own personal service company, but could also be a partnership, personal service company or an individua
HMRC details a contract, for the purpose of the IR35 off-payroll working rules, is a written, verbal or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis.
A worker may have some contracts which fall within the off-payroll working rules and some which do not.
Given the complex nature of the IR35 rules, the Government provides a Check Employment Status for Tax (CEST) tool on its website.
This free-to-use tool allows users to work out if a worker on a specific engagement should be classed as employed or self-employed for tax purposes.
The tool can be used by hirers, agencies or workers themselves.
Before using the tool, users will need to know:
- Details of the contract
- The worker’s responsibilities
- Who decides what work needs to be done
- Who decides when, where and how the work is done
- How the worker will be paid
- If the engagement includes any corporate benefits or reimbursement for expenses
When the tool has been used, users will be able to use the result as a valid status determination statement when considering the off-payroll working rules.
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