Off-payroll legislation: how it will affect limited company contractors
For any limited company contractor out of the loop, or just in need of a recap, draft legislation went live on Thursday to change IR35 in the private sector from April 2020, writes Graham Fisher, chief executive of contractor accountants Orange Genie.
The long and short of it? The legislation tabled on July 11th 2019 looks remarkably unchanged from both HMRC’s March 2019 consultation and its now in-force April 2017 reforms to IR35 in the public sector, save for two new introductions:
1. Status Determination Statement
2. Client-Led Status Disagreement Process
Much of the contractor industry sounds very disappointed that HMRC and HM Treasury have not listened to reports of problems with the reforms ever since the March consultation, and their April 2017 commencement. Both HMRC and HMT and have not had the good sense to delay the commencement of the reforms by a year. They are instead pushing on with the biggest contractor tax change since IR35 was introduced, and doing so at time of considerable uncertainty for the UK.
Nonetheless, here’s what we now know about 'Off-Payroll Working in the Private Sector':
- April 2020 will commence a revised approach to and rules on IR35, for the private sector.
- Like the public sector since April 2017, end-clients will be responsible for determining IR35 status of assignments for the PSC and limited company contractors they engage.
- “Small” end clients as defined by s382 and s383 of the Companies Act 2006 will be exempt from these rules; in those situations, the contractor remains responsible for determining their assignment’s IR35 status. Clients need not notify that they are ‘small.’
- An end-client will have a duty of ‘reasonable care’ when making an IR35 status determination and must share their determination and reasons with the supply chain in a Status Determination Statement.
- A Status Determination Statement – in effect the client’s view of the IR35 position and the client’s reasons for that view -- will not count if the client has failed to take ‘reasonable care’ (a clause in the bill stipulates ‘reasonable care’ but does not define what it involves, despite the same duty being already in place for public sector engagers).
- There will be a statutory Client-Led Status Disagreement process. End-clients have 45 days in which to respond to contractors or recruiters concerned or questioning about their status determination.
- If an assignment is decided by the client to be inside IR35, the “fee-payer” in the chain must deduct the appropriate taxes and NICs.
- Debt liabilities can be transferred back up the supply chain to the end-client if taxes remain uncollected.
- A PSC found to be inside IR35 loses the ability to claim 5% of turnover as an allowable deduction to cover the cost of operating their limited company or PSC.
- These debt transfer provisions and the ‘right of appeal’ (the client-led status disagreement process) are also introduced in the public sector IR35 framework.
Transfer of Debt
At this still early stage in assessing the draft IR35 legislation, our understanding is that where a party in the supply chain fails to comply with the requirement to share the status determination, HMRC can seek to recover PAYE and NICs if they have not received this from the “Fee-payer.”
If they are unsuccessful in collecting from the Fee-payer, or the party who failed to comply, HMRC will go back to the highest agency in the chain i.e. the one engaged with the end-client and seek to collect the funds from them, believing they should be able to enforce compliance in the chain. This is likely to be unpopular with agencies and of some concern that the failure by another body can be passed back to them.
Since the public sector IR35 reforms of 2017, questions have been raised as to the validity of HMRC’s claims of the ‘tax losses’ arising from apparent abuse of IR35.
How are we to take seriously the validity of any of HMRC’s findings when their own published figures continue to contradict? The newly published summary of consultation responses clearly states that abuse of the rules in the private sector is expected to cost the exchequer £1.3billion in 2023/24 and yet on the very same day, the published commentary to the draft legislation says the impact is more like £725million.That’s a large discrepancy by anyone’s standards.
Some of the Revenue’s other claims also don’t stand up to scrutiny. For example, with the potential for switching between ‘inside’ and ‘outside’ IR35 contracts more often, and the complexities involved with deciding if you should appeal a status determination, and when working at a client who is ‘small’ (meaning the 2020 rules won’t apply), good tax planning and the support of an accountant are going to be even more valuable, contrary to HMRC’s claims in its policy note that:
‘There will be on-going savings for around 230,000 PSCs who will no longer have the requirement for determining status or associated accounting burdens.’
IR35 ‘Blanket’ Decision-Making
HMRC have short or selective memories. They reported on Thursday of “no evidence” of blanket IR35 decision-making in the public sector. Well, many advisers including us have witnessed ‘blanketing’ across various public sector organisations – TfL being among the most high-profile.
Even more incredulous is their statement that no evidence has been provided in the consultation to suggest that blanket decisions would be a particular problem in the private sector. One has to wonder if the chancellor and his HM Treasury team have spent the last few weeks locked away from the news. To date, the industry has seen HSBC, Morgan Stanley and other financial firms internally announce their approaches to the new rules and outwardly at least, they appear to be IR35 decisions universally made across the contractor base.
Perhaps half the reason HMRC can claim ‘no evidence’ in the instances it does, is that is choosing not to see the evidence. In fact, it would appear that not all responses have been included in the respondents listed – ours for instance, and another organisation that has confirmed to us they replied to HMRC, but are not featured as having contributed. It all rather seems like everything was a ‘done deal’ and the consultation was a waste of time.
What HMRC does mention in its consultation response is CEST. Well, HMRC have been promising improvements to CEST prior to Budget 2018 – last year, when they announced their plans to move forward with the off-payroll working in the private sector proposals.
On Thursday, we continued to see more (so far) empty promises and commitments to enhance the tool, in order to better assist end-clients who have to make the IR35 status determinations. And yet with HMRC regularly losing their IR35 cases when taken to tribunal, how much faith can we have in this tool?
Keep the faith (O ye of little faith!) – and act
How much faith or confidence we can have in IR35 policymakers generally, is also a question many are now asking. Like you perhaps, my immediate reaction to the draft IR35 legislation was one of incredible frustration. It is hugely disappointing our industry has not been listened to or understood. There is no delay. There is no proper appeals process. There will be no employment rights for contractors. There will be no duty on engagers to declare their status as ‘small’ or otherwise. And in many cases, contractors risk being forced into paying employment taxes inappropriately.
Nevertheless, we recommend that all parties in the supply chain take action now to prepare for next April, even if you feel continuing to argue is futile. There is still time to try and influence the final legislation – (not envisioned until November), given that you can have your say until September 5th 2019. If we don’t work together to try, we will never know what we could have achieved. So much of what HMRC and HMT published last week IR35 can be challenged.
Right now, everyone in the supply chain needs to be talking. End-clients are concerned by the burden of responsibility and the potential disruption to business that a loss of resource could cause. Recruiters and contractors alike should be talking to end-clients in order that parties can assess together the size of any potential problem in April 2020. Don’t wait for guidance and advice from HMRC; we can’t be sure when it is coming or its value. Seek professional opinions and support now and assess your roles, contracts and working practices to ensure everyone has the best chance of an optimal outcome.