After the hasty and somewhat disastrous public sector IR35 reform rollout, HMRC announced the consultation document ‘Off-payroll working rules from April 2020’ on 5th March 2019 in the hopes of addressing any concerns about the respective private sector IR35 launch.
Defining the scope of the IR35 reform
Do you agree with taking a simplified approach for bringing non-corporate entities into the scope of the reform?
It would be highly unlikely that a medium or large-sized business would divest itself of its corporate wrapper simply to rid itself of obligations under the ‘off-payroll’ rules. As such, it should not be necessary to bring non-corporate organisations within the rules but to allay any concerns that HMRC may still have, we would recommend that the same criteria, as set out in s.382 Companies Act 2006, apply to all businesses regardless of their structure.
To impose separate criteria for different structures simply adds another layer of complexity and complication and might also have the unintended consequence of bringing certain non-corporate businesses within the scope of the legislation that had not been originally conceived.
IR35 Information requirements
Would a requirement for clients to provide a status determination directly to workers they engage, as well as the party they contract with, give off-payroll workers sufficient certainty over their tax position and their obligations under the off-payroll reform?
It should be a fundamental right of the worker to know their employment status as deemed by the end client. Furthermore, the reasons behind each status decision should be required to be given to the worker rather than it simply be at the request of the worker. This will ensure that a proper audit trail can be followed, thereby also assisting HMRC in the event that they may seek to review status determinations.
Simply advising a worker whether or not they fall within the ‘off-payroll’ rules does not provide the full story and therefore does not provide a sufficient degree of certainty.
It is because the very nature of employment status is not a precise science, that absolute certainty cannot be achieved, particularly where there is an absence of the necessary expertise within the end client organisation. Even though HMRC seek to provide assurances by reference to CEST, results generated by the online tool still have to be tested by HMRC to ensure that the questions have been interpreted and answered correctly. Only then, would an end client and worker have the requisite certainty that the correct decision had been reached.
Would a requirement on parties in the labour supply chain to pass on the client’s determination (and reasons where provided) until it reaches the fee-payer give the fee-payer sufficient certainty over its tax position and its obligations under the off-payroll reform?
In the event that an ‘outside of IR35’ determination was successfully challenged by HMRC, the resultant PAYE and NIC liability should not rest with the fee-payer but rather the engager. It is iniquitous that the fee-payer should be penalised for simply following instructions. Legislation should therefore make it clear that the tax and NIC debt lies with the engager in such a scenario so as to provide certainty to the fee-payer that its tax obligations have been fulfilled once and for all.
What circumstances might result in a breakdown in the information being cascaded to the fee-payer?
In most cases, we would envisage the agency and fee-payer being one and the same organisation, making the communication of information a two-way process and therefore relatively straightforward.
There are other situations however, where recruiters in the supply chain are prevented from having contact with end clients, particularly where there is a Managed Service Provider (MSP) in the chain who contractually prohibits second-tier suppliers from contacting end clients.
At the very outset of a contract, the identity of the fee-payer and its residency status should be made known to all parties in the labour supply chain. Should a different fee-payer be appointed at any time, then this should be brought to all parties attention immediately, so as to ensure the flow of information is not stalled. Perhaps the easiest and most efficient way to deal with this issue is to make it a requirement for the end client to provide the fee-payer with the determination directly.
Are there potential unintended consequences or impacts of placing a requirement for the worker’s PSC to consider whether Chapter 8, Part 2 ITEPA 2003 should be applied to an engagement where they have not received a determination from a public sector or medium/large-sized client organisation taking such an approach?
To make it clear to a PSC whether or not they themselves have to assess a workers’ IR35 status, the end client should be required to acknowledge, in writing, to the contractor, whether or not they are a medium or large-sized business for the purposes of the ‘off-payroll’ rules. This should be done within, say 30 days. Failure to do so, would result in the PSC being able to safely assume that the ‘off-payroll’ rules are not applicable and that they should self-determine their IR35 risk.
In the event that they should have applied the ‘off-payroll’ rules yet failed to do so, then the end client or fee-payer would be held solely liable for any tax and NIC. This situation would remain in force until such time that the position was remedied.
Helping organisations to make the correct IR35 status determination and ensuring reasonable care
Is it desirable for a client-led process for resolving status disagreements to be put in place to allow off-payroll workers and fee-payers to challenge status determinations?
The lack of any formal appeal process has been a criticism of HMRC for a number of years now and the government’s proposal that any status disputes should be dealt with ‘in-house’ suggests that HMRC do not have the resources or time to handle such disputes. Nevertheless, we welcome any suggestion to empower the worker to challenge a status decision where they fundamentally disagree with the opinion of the end client.
Given the current prevailing attitude of those HMRC officials involved with status work, which sadly falls short of the requisite level of impartiality one would expect, we welcome the proposal of a client-led resolution process. This is because we feel that end clients may be more prepared to listen to rational argument and give proper consideration to the relevance of facts and information, therefore arriving at a fair decision.
Other IR35 matters
Are there any other issues that you believe the government needs to consider when implementing the reform?
HMRC have signalled their intentions to improve their CEST tool which is to be welcomed. Nevertheless, if it is to be robust and reliable it must address all the tests of employment status and we are not certain that this is achievable. For example, the business on own account test may only be capable of being answered by the contractor as an end client or agency would not be privy to the information required to answer questions about this test. Furthermore, mutuality of obligation (MOO) is a fundamental test of employment, yet it does not feature whatsoever in the CEST tool because of HMRC’s extremely narrow definition, ie the irreducible minimum. Failure to include this test by reference to a more sophisticated definition of MOO renders the tool incomplete. We note that HMRC are seeking to work with IR35 forum members and stakeholders to agree a version of MOO and also to consider how MOO can be included in CEST.
Decisions generated by CEST should better explain the rationale behind those decisions, giving commentary that will both educate the user and instil trust in the tool.
HMRC should make it clear that the CEST tool is not mandatory and that alternative employment status resources can be employed to help the user in reaching a decision.
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