The government has confirmed those affected by IR35 tax changes, potentially bringing hundreds of thousands of freelancers within PAYE, will not be fined if they get things wrong in its first year.

Unless, that is, the taxman finds evidence of deliberate non-compliance with the controversial new IR35 rules.

This soft-landing period will only last until April 2021.

The Treasury has published the findings of its review into IR35 off-payroll working rules, due to come into force next month.

As expected, there will be no delay to the implementation to IR35, but the key changes are:

• Customers (both employers and freelance contractors) 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
• HMRC will amend the legislation to exclude wholly overseas organisations with no UK presence
• The government will have a legal right to force clients to respond to a request for information about their size from an agency or worker

Brian Palmer, AAT tax policy adviser said: “This means that if employers or [freelance] contractors have taken reasonable steps to comply but get something wrong, HMRC will not be pursuing them with fines and penalties.”

>See also: One third of freelancers say IR35 changes affecting mental health, contemplating suicide

Julia Kermode, chief executive of freelance contractor association FCSA, who gave evidence to the House of Lords this week about the changes, said that she got “the distinct impression that they were not supportive of the legislation … in the meantime, I would strongly urge everyone to prepare for the reforms as penalties will still be issued for deliberate non-compliance”.

Sophie Wingfield, director of policy at the Recruitment and Employment Confederation, said: “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves … what’s obvious form this is the Treasury knows 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.”

Unofficial strike begins

However, in new research published today, accountancy firm inniAccounts says that one in three contractors have already walked away from clients they feel have unfairly brought them within the tractor beam of PAYE.

Just 14 per cent of contractors have been assessed as being outside IR35, contrary to HMRC’s expected 66 per cent, as employers play it safe, adding to contractors’ grievances. They are being expected to pay PAYE and national insurance without the benefits of being a full-time employee, they argue.

Indeed, 85 per cent of contractors surveyed would consider joining a class action to fight for their employment rights.

The research, conducted with over 2,800 contractors, also found that 37 per cent are still being assessed, despite only being six weeks away from IR35 going live.

James Poyser, CEO of inniAccounts, said: “The review will do absolutely nothing to turn the tide of actions being taken by contractors. The review plays down flight risk. It’s nonsense, we are very clearly seeing that happen.

“It seems that businesses see inside IR35 or an umbrella company or PAYE as the lowest-risk option, but this is far from the case, as class action starts to bubble up. What’s more, many contractors would rather leave than accept these terms, presenting a risk to client projects and costing national productivity £2.2bn, as well as HMRC’s coffers.”

Timebomb for accountants

And accountancy body ACCA also voiced alarm, saying the IR35 changes could be a “timebomb” for small accountancy firms with large numbers of freelance contractor clients who operate via personal service companies.

Many contractors, who are typically paid a day rate for their services, are expected to liquidate their PSCs, as the number of contracts allowing them to work this way shrinks dramatically.

The government has proposed the changes to contracting tax rules in the private sector to combat what it terms “disguised employment”, where contractors do essentially the same work as employees but play less tax and reduced national insurance contributions.

Treasury believes the changes could bring in an extra £1.2bn a year in tax.

Further reading on IR35

6 top tips to prepare for IR35 tax changes – Small Business checklist