Contractors who have been determined to be inside of IR35 but have no cash, will not pay the resulting tax and penalties incurred due to their incorrect determination. HMRC will not be able to transfer liability to the contractor in these cases.
This is because of Regulation 72, which provides for those without resources in the case that unpaid tax debts are due. This is unlikely to be overturned under any circumstances, and with the rising financial strain of the pandemic in play, contractors are wise to be aware of this regulation.
If a contractor can demonstrate that they have applied due diligence in determining their status and have no money to pay the back tax, they will not have to assume the debt themselves. This lack of personal liability will not negate the review done by HMRC. However, there can be costs associated with this. Contractors should take out tax insurance to cover these potential costs.
When Does Reg 72 Apply?
This regulation is applied under two circumstances. In the case, that debt can be transferred when the employer has taken reasonable care to comply with IR35 and deduct the right taxes from their engaged contractor’s salary. These are good faith errors. It also applies in the case that the employer willfully chose not to deduct the correct tax.
Most contractors will always exercise reasonable care, so the first case is the most common regulation use. HMRC will handle these cases with an eye to who was responsible for the error and why it has occurred, but the fact remains that a contractor with no resources will not be able to pay back the back tax that is owed.
The second case also applies to contractors who work under their own limited companies. Even though the contractor is the business owner in this instance, they will fall under the second case due to honest error.
If a contractor ignores an expert’s findings or willfully chooses not to pay tax, then Reg 72 may apply to them. The contractor might find that HMRC will go after them for back tax due to this difference.
Be Wary When Closing Companies
Reg 72 can apply if the contractor has ceased trading and has asked for a strike-off for contractors who are closing their company. In these cases, the HMRC may challenge the striking off order being executed when there is nothing left in the company. This would mean that HMRC would be going after the contractor personally for the back tax.
Contractors are always urged to have tax insurance and make sure that they are not paying incorrect taxes. There is no need to stay on a sinking ship until the money has completely run out, and contractors are urged to take steps immediately if they think that they will no longer be able to pay back tax should it be owed.
HMRC will not be prevented from taking contractors through the legal process of an investigation, even if there is no money left to be taken for the back tax at the end of the day. Contractors need to figure in a possible investigation as a part of their operating costs, especially once IR35 is rolled out.
