Last week, contractors’ eyes were fixed on the government website and the arrival of the IR35 consultation, that HMRC is holding to gather feedback in order to fine tune the rules around the introduction of private sector IR35 reform*.
To recap, from April 2020*, contractors will no longer be able to decide their own IR35 status when working with medium and large companies in the private sector. The responsibility for administering IR35 will be handed to the end client, that will also carry the liability if they are the party paying the contractor. Should a recruitment agency be involved in the process as the fee payer, the liability will be passed to them, as it is in the public sector.
On the evening before the opening of this consultation, Mel Stride, the Financial Secretary to The Treasury reiterated that the government believes public sector reform, introduced in 2017, has been successful. He cited the additional £550m raised in income tax and national insurance contributions as evidence that the measure is working, before claiming that non-compliance in the private sector will cost the UK economy £1.3bn a year by 2023/24. This figure was also referenced in the consultation document, that revealed a number of other minor adjustments to the rule changes that were introduced in the public sector.
To help you make sense of the IR35 consultation information, we’ve broken it down for you below:
Which parties will become responsible for IR35?
Private sector reform will only apply to medium and large companies. In the document, HMRC said the “advantage of this approach is that the majority of companies, as well as tax and accountancy professionals, are likely to already be familiar with this definition and to what extent it applies to their operations.”
As expected, 1.5m small businesses will be exempt from next year’s rule changes. Companies with an annual turnover of no more than £10.2m, a balance sheet total no more than £5.1m and no more than 50 employees qualify. Businesses in small groups, as defined by S.383 Companies Act 2006 will also be considered ‘small’ by HMRC.
This also means that contractors working with clients that fall under HMRC’s definition of ‘small’ will continue to set their own IR35 status from next April.
Who will carry the liability?
The fee payer in the supply chain will be liable, like in the public sector. This means that end-clients that engage and pay contractors directly and recruitment agencies that take care of paying the contractors they place will become liable should HMRC find any inaccurate decisions have been made.
Was there any news on blanket determinations?
After the public sector rules were changed, it became apparent that a number of organisations carried out ‘blanket determinations’. This forced many contractors inside IR35 irrespective of the fact they might well have belonged outside the scope of the legislation.
HMRC addressed this issue again in the consultation document, insisting that ‘reasonable care’ needs be taken by companies administering IR35 and that blanket decisions are not compliant. It went on to explain that it will result in the liability being transferred from the fee payer to the client. This is in keeping with the public sector rules.
However, the government does view decisions made to a group of off-payroll workers with the same role, terms and contractual conditions as “appropriate in some circumstances.” Tax specialists are concerned about this, arguing that it increases the chances of mistakes being made when setting status.
Will contractors be able to dispute decisions?
Apparently so. The government has said it will implement a “client-led” resolution process for when a contractor disagrees with an IR35 decision. HMRC stopped short of explaining the specifics of how this might work but has said it believes a client should provide reasons for making a status decision and plans to give workers the right to challenge them.
HMRC wants to introduce rules that make sure each party in the contractual chain understands why a particular decision has been made. In theory, this will give contractors greater clarity over their tax position and help all other parties understand their obligations.
Will there be any enhancements made to CEST?
Yes. HMRC plans to collaborate with stakeholders to improve the IR35 tool; CEST (Check for Employment Status for Tax), which critics claim is not capable of contributing to accurate status decisions. Along with this, the government will “develop an education and support package for those affected to help them prepare for and implement changes to the off-payroll working rules.”
In the coming months, HMRC has asked for feedback on the IR35 consultation, which closes on 28th May. During this time, experts from the contracting, recruitment and business communities are expected to contribute to the discussion to help the government realise the importance of implementing changes that do the least damage to the UK’s flexible workforce.
*Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.