Business owners have had a lot on their minds over the course of 2020, from dealing with the impacts of the COVID-19 pandemic to preparing for the end of the Brexit transition period, all while remaining up to date on compliance.
While HMRC briefly paused its tax investigations earlier in the year, it has since resumed them and will be cracking down on instances of non-compliance as much as before the pandemic hit, if not more so.

HMRC has confirmed it will take the impact of coronavirus into account when dealing with tax penalty appeals and, as a general rule, it tends to be more forgiving of genuine mistakes than deliberate errors.

That said, accidental errors can still incur penalties. To help you avoid them altogether, we’ve compiled a list of the main compliance changes taking place in 2021.

Off-payroll working rules (IR35)

Reforms to the off-payroll working rules known as IR35 were originally due to extend to the private sector in April 2020, but as a result of COVID-19 they were pushed back a year. They’ll now take effect from 6 April 2021.

This legislation will affect you if you provide services through an intermediary, such as your own limited company, or if you run a medium or large-sized business that uses contractors who work in this way.

The change in the rules will make clients responsible for determining the employment status of their contractors for tax purposes, instead of the worker’s intermediary being responsible as they are at the moment.

Contractors who are deemed to be ‘inside’ of IR35 will be required to pay tax and national insurance as if they were employed.

Small businesses are exempt from the change, so intermediaries will continue to determine the worker’s employment status when they work for smaller clients.

VAT reverse charge for construction

The VAT reverse charge is a major change in VAT accounting in the construction industry, which is due to take effect from 1 March 2021.

Like IR35, this measure has been delayed as a result of the coronavirus pandemic.

It will apply to standard and reduced-rate VAT services provided to individuals or businesses who are registered for VAT in the UK, that are reported within the construction industry scheme.

If your business operates in the construction industry, you should work out how the reverse charge could impact your cashflow, and prepare your accounting systems and staff to deal with the change.

Digital links under MTD

HMRC’s Making Tax Digital (MTD) scheme is being rolled out in several stages, with changes planned for the next few years that will see business owners and landlords brought into the scheme.

If you’ve been brought into the first mandatory phase of the scheme, MTD for VAT, you’ll be used to digital filing and record-keeping by now, but the rules are set to tighten slightly next year.

Under the scheme’s current requirements, you don’t need to have digital links between pieces of software – in other words, you can copy or cut and paste bits of information from one place to another.

From April 2021, this will no longer be considered MTD-compliant, and you could incur a penalty by doing so.

The best solution to this is to set up online accounting software like Xero, which brings together all of your data in one place, without the need for manual input.

Other tax and regulatory changes

When the new tax year begins on 6 April 2021, we can expect some tax changes to take place.

According to documents from the 2020 spending review, the personal allowance and basic-rate limit for income tax will rise in line with CPI,  as will the limits and thresholds for national insurance.

While a date has yet to be confirmed for the next Budget, following the cancellation of the one that was due to take place in autumn 2020, it’s safe to assume that major changes will be announced to cover Government spending on various COVID-19 support schemes this year.

Finally, the end of the transition period following the UK’s exit from the EU is likely to bring about changes for anyone importing or exporting to the EU.

We can help you to remain compliant with tax rules in 2021.