Thousands of companies throughout the UK may be breaking the rules when it comes to reviewing the status of the freelance contractors who work for them, particularly in determining whether these contractors fall inside vs outside IR35, says leading tax and advisory firm Blick Rothenberg.

The warning comes at the end of National payroll week and Robert Salter a client service director with the firm said: “Since April Companies are required to assess whether each contractor is working in a pattern which is ‘akin to that of an employee’ unless they are exempt from the IR35 requirements as small enterprises.”

He added: “Businesses are now legally obliged to account for PAYE and NICs on the invoices it receives from PSCs rather than simply paying them on a gross basis, where the contractor is held to be a ‘deemed employee’ of the end business. Failures by the businesses using freelance contractors in this regard can result in the business being liable to Interest and penalty charges in respect of the underpaid tax (with penalties potentially being as high as 100% in some scenarios. They must account for the PAYE which should have been accounted for and are liable to employee and employer NICs on the invoices.”

Robert said: “Although the new legislation has been in place since April many businesses who are impacted by the IR35 changes are actually either (a) totally unaware of the new regulations, or (b) have not been able to invest in training staff vis-à-vis their obligations in this area and the obligations which one needs to meet, to protect the business from unwelcome tax and NIC charges.”

He added: “Whilst these shortcomings are inevitable given the pressures businesses have been experiencing with Covid and the underlying difficulties associated with the core regulations – which are hard to understand and apply in practice – such factors will not provide businesses with any meaningful ‘defence’ in the case of a formal Revenue enquiry into this area.

“Moreover, businesses need to realize that HMRC teams have been staffed to specifically address this issue on a going forward basis, so the chance of receiving future enquiries in this regard are significant for most businesses.”

Robert said: “On aa going forward basis, businesses should – if they haven’t already – start reviewing the position of their contract employees and ensuring that these reviews are clearly documented. If this delayed review does highlight any problems, they should discuss the position with their advisors as a matter of urgency. If they don’t, they risk getting into even more problems and difficulties over the coming months and years.”