HMRC has published the Summary of Responses to the consultation ‘Off-payroll working rules from April 2020’ (our response to which you can read here) but it appears that, as with many HMRC consultations, this is another fait accompli. We shouldn’t be too surprised, however, because HMRC had convinced itself that the public sector blueprint has been a success and are imposing it on the private sector, with some appropriate tweaks.
According to the Revenue, based on 12 months’ worth of PAYE and NIC receipts, an additional £550M has been raised as a result of the rules being applied in the public sector.
Who will be affected by the private sector IR35 reform?
According to HMRC, the following will be affected by the extension of the off-payroll rules from April 2020:
- 170,000 contractors being deemed disguised employees. Typically, there is no explanation as to how HMRC have arrived at this figure;
- Up to 60,000 client companies who engage freelancers; and
- Approximately 20,000 agencies.
Brazenly, the Revenue states that there will be ongoing savings for around 230,000 PSCs due to them not having to self-assess their IR35 status or associated accounting burdens. What parallel universe are HMRC operating in when they think it worthwhile to make this point when the contractor will be suffering PAYE tax and NIC deductions?
Private sector engagers
The Companies Act test for corporate organisations received favour amongst respondents to the consultation (there were over 200 written responses). For unincorporated businesses, a simplified test will apply whereby those with a turnover exceeding £10.2M for a calendar year will be within the scope of the off-payroll rules. The test will apply for the tax year following the calendar year in which the businesses turnover tips £10.2M.
Where companies cease to be small, and therefore come within the scope of the off-payroll rules, the rules will only take effect from the start of the tax year following the filing date. After this date, it ceases to qualify as a small company under the Companies Act 2006, i.e. exceeding two or more of the following limits:
- Annual turnover not more than £10.2M
- Balance sheet total not more than £5.1M
- No more than 50 employees
Employment status IR35 decisions
HMRC apparently disapprove of blanket assessments, be they inside or outside of IR35. That’s the official line of course, but I doubt they would kick off and intervene where an engager was taking a risk-averse approach and payrolling large swathes of contractors. Anyway, they haven’t actually seen any evidence of blanket determinations being made in the public sector! There’s that parallel universe again - the rest of us know this has happened!
Clients (engagers), who are medium or large-sized companies, will be required to pass the IR35 status determination and the reasons for their decisions down the contractual chain, as well as to the contractor directly. This information will be contained within a valid Status Determination Statement. Evidence arising out of responses to the consultation suggest that labour supply chains are generally robust enough to ensure that information can be passed through effectively.
The simplified approach whereby the fee-payer would receive the IR35 determination directly from the client was rejected due to practical difficulties associated with the engager actually being able to identify the fee-payer.
HMRC is trying to improve its much-maligned IR35 status determination tool so that it works effectively. Is that an admission that it is currently ineffective? Enhancements will be tested with stakeholders and users, and then rolled out before April 2020, However, they don’t say how long before April of next year and it’s still likely to be flawed.
Over 25 CEST user research sessions have been carried out by HMRC and the department are continuing to work with a wide range of stakeholders on its enhancement of the service. That’s all well and good but if HMRC isn’t prepared to fully listen to those outside of its bubble and carry on in its own merry way, then CEST is never going to be fully fit for purpose.
Non-compliance with IR35 and transfer of tax debt
Where HMRC does not receive the PAYE tax and NIC, the liability will initially rest with the party that has failed to fulfil its obligations until such time that it does. This means that liability would move down the contractual chain as each party fulfils its obligations. Therefore, where an agency in a chain failed to pass on a determination, that agency would be liable for the tax and NIC. Similarly, if a fee-payer, having received the determination failed to make the necessary PAYE and NIC deductions, then it would become liable.
Where HMRC is unable to collect tax and NIC arrears from one party, e.g. because it ceased to exist, then the tax debt will transfer back to the first party or agency in the chain. Where this is not possible, then the end client will carry the can.
Consultation response showed concerns over transfer of tax debt
There were concerns and resistance to these original proposals from some respondents, of which Larsen Howie was one, based on the iniquity of a client and agency at the top of the chain, who had taken reasonable care, being held accountable for tax and NIC because of business failures and administrative errors elsewhere in the supply chain. HMRC has now clarified that the transfer of liability provisions are only intended to be used in circumstances in which, say, a promoter of tax avoidance is inserted into the labour supply chain and not in cases of genuine business failures.
HMRC says it will set out in clear guidance the circumstances in which it will not seek unpaid tax and NIC from those further up the labour supply chain. The guidance will also advise organisations on steps they can take to help ensure due diligence of their internal processes, i.e. reasonable care.
Proper checks are essential for fair transfer of tax debt
The draft legislation permits the transfer of debt where an HMRC officer considers this should be the case. I sincerely hope that proper checks and balances will be required and put in place rather than leaving such a key decision to the discretion of some overzealous Revenue official.
Larsen Howie was never in favour of this proposal and I echo the comments made by Colin Ben-Nathan, Chair of the Chartered Institute of Taxation’s Employment Taxes Sub-committee:
“We also remain concerned by the transfer of liability provisions whereby a failure on the part of a party further down a supply chain can result in PAYE and NIC liabilities falling back to the top agency in the supply chain – and ultimately, where HMRC is unable to recover the liability from that agency, the end client. We agree that there is a need for all parties in the labour supply chain to act appropriately and diligently. However, where HMRC are unable to recover the PAYE and NICs, we think it is unfair and disproportionate for the liability to simply be transferred to the top agency/end-client…….. We think the Government should legislate along the same lines as applies for agency workers where liability for PAYE is only transferred in very narrowly defined circumstances.”
IR35 status dispute resolution
Larsen Howie was in favour of a client-led process for resolving the issue of contractors disputing an IR35 status decision. Whilst there is an administrative and cost burden to the engager, which could be minimised during the course of time, we feel that engagers will be more receptive to listening to rational counterclaims and far more impartial than HMRC.
The legislation will set out the minimum requirements for the disagreement progress to ensure fair treatment for contractors, regardless of who the end client is. This will require end-clients to respond to representations made by contractors or fee-payers who challenge their IR35 status determination within 45 days of receipt of such a challenge. Failure to do so will result in the engager being held liable for the tax and NIC. To support end-clients, HMRC will produce guidance setting out how an end-client can meet its obligations to take reasonable care and how it might implement the dispute process.
A large majority of respondents suggested that it was unlikely that either fee-payers or contractors would take up the proposed facility to make pension contributions through the fee-payer. This proposal has therefore been temporarily parked.
Further effects of IR35 on the public sector
Other than the criteria for an end-client to qualify as a small company, and therefore be unaffected by the off-payroll rules, all other legislative amendments will equally apply to public authorities. HMRC will, therefore, revise its guidance for public sector bodies to take account of the changes.
Many engagers and agencies have started to put wheels in motion based on the original IR35 reform proposals which, for the most part, are set in the draft legislation. Their planning is largely unhindered. For those that have yet to start their preparations, preferring to wait and see if the proposals would be enacted, now is the time to spring into action. Larsen Howie can help all these organisations, whatever stage they are at in the journey.
Additional IR35 notes
If you’re concerned about IR35, we offer a range of contract reviews with comprehensive advice on how to stay outside the legislation. We also offer IR35 Tax Investigation & Liabilities insurance (TILI), which includes tribunal defence from our resident tax and IR35 expert Andy Vessey ATT as part of the policy. Andy is also available for IR35 training, conferences and specialist commentary on the off-payroll rules. Please get in touch.
You can also read more about IR35 and what you can do to minimise your investigation risk here.